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Last week, € fell for the fifth straight week versus $, its longest losing streak in almost two years, on concerns that Europe’s debt crisis is worsening. On Thursday, € hit its lowest level against $ in 16 months amid concerns about the euro zone countries’ ability to raise funding. Decent demand for French sovereign debt at a morning auction did not lend support to €, which fell 1.2% on the day. French 10-year bond yields were higher as investors remained concerned that the country’s AAA credit rating is under threat.

The greenback rose to its highest level in nearly a year against other major currencies, with better-than-expected US jobs data for December — 200,000 jobs were created —, helping send the dollar index up 1% and raising hopes the world economy could avoid another recession due to the euro zone woes. € lost 0.6% after US non-farm payrolls data, following a week that saw the single currency lose nearly 2% of its value.

€ also continued its slide against ¥ after hitting an 11-year low last Wednesday, and lost 1.8% over the week.£ also hit its highest level against € in 16 months, moving up 0.4% after a surprise rise in the UK services sector in December. £ was also continuing to benefit from safe haven demand as prospects for the euro zone continued to look shaky.

In Asia, the Chinese yuan had its first weekly decline in a month after the People’s Bank of China set the fixing 0.18% weaker last Thursday, the biggest reduction since November 15, amid concern Europe’s debt crisis will cool demand for Chinese exports.

In India’s inter-bank market, rupee completed its first weekly gain in a month against $ last week. The Indian unit received a boost from higher FII inflows ($1.2 billion in both debt and equity). Rupee also received support as the RBI eased rules for companies to borrow from abroad and after the government allowed overseas individual investors to directly buy local equities.

Hopes of rate cuts further boosted sentiment. The rupee-$ pair traded in the 52.61-53.3463 range and rupee appreciated 0.6%.

Looking ahead, momentum favours further greenback strength, but extremely one-sided market sentiment warns that any € correction against $ could be fierce in another week full of key event risks.

Data show speculators are at their most net-short on € against $ since the inception of the single European currency. Incredibly one-sided sentiment warns that any short-covering rally could be quite fierce.

Not much US data are scheduled for the week, so the market will focus on Europe, without ignoring any possible sound-bytes of US Federal Reserve officials, late-week advance retail sales data, or further improvements in US labour data.

In India, rupee has seen some stability in recent weeks. However, the depreciation bias on rupee can persist and the Indian unit remains susceptible to pressure if the global market sentiment and risk appetite remains weak. Current account deficit can widen further with oil prices seeing renewed upward momentum on account of geo-political tensions around Iran, while exports growth momentum is slowing down. The depreciation pressure could mount in a scenario where capital inflows slow down or if there are outflows. Measures taken last week in this regard by the RBI and the government would yield positive results, albeit in the medium term. This week, the rupee -$ pair will likely trade in the range of 52.50-53.50.

The writer is senior economist, Royal Bank of Scotland NV, and can be reached at gaurav.kapur@rbs.com. Views are personal.