The US$ was mixed overnight, higher against the yen and sterling, while falling lower against the euro. The U.S. received some data this morning that sheds light on the continuing dichotomy between inflation and U.S. growth. Retail sales figures were released alongside producer prices at 8:30 a.m. The numbers pointed to a mixed view of the U.S. economy. Producer prices, which were expected to increase to 6.4% from 4.4%, only increased 6.1%. Excluding food and energy, PPI rose 2.5% versus expectations of 2.6%. Retail sales remained above forecast, showing an increase of 0.2% versus 0.1% expectations. Generally, this data should be mildly supportive of the US$ as recent interest rate cuts by the Federal Reserve allow significant upside risks to inflation. Additionally, the retail sales figures, which are admittedly volatile, suggest that the weakness in the housing sector remains isolated from consumer spending. This should help to pare back expectations of further interest rate cuts in December.
The euro gained versus the US$ overnight, remaining close to the all-time highs. The gains in the US$ thus far have been extremely limited, suggesting that the recent rise is apart of a significant market shift, likely the result of continued central bank diversification. The overnight gains come as European economic growth was shown to increase slightly more than expected, coming in at 0.7% versus 0.6% expectations. This suggests that the strong euro has not hampered economic growth, despite concerns from European finance ministers. There is still a growing scope for US$ gains over the coming weeks as the market continues to anticipate a change in rhetoric coming from the U.S. Treasury Department.
The yen was weaker overnight after gains yesterday in equity markets spurred a slight re-entry into the carry trade. The correlation between the yen and global equity markets remains extremely strong. As equities gain, the yen falls, while the opposite is also true. The Bank of Japan meeting this week showed that the BOJ does not have interest in raising interest rates in the near term, helping to keep interest rate differentials wide. At the same time, the Japanese Prime Minister has issued comments stating that rapid appreciation of the yen is unwanted. These comments are likely to re-emerge should the yen continue to fluctuate wildly.
The pound was extremely volatile in the overnight session. Sterling initially gained after the unemployment rate was shown to fall to the lowest in 2 1/2 years, while U.K. average earnings also rose an above forecast 4.1%. Shortly after these reports were issued, the Bank of England issued its quarterly inflation report. The report showed that inflation will fall within the Bank's 2% target level over the next two years, even if the Bank were to cut interest rates at least once in early 2008. Growth is also seen slowing beyond its long-term average. At the news conference following the report, BOE Governor Mervyn King had to deny considerations that he would or should resign ahead of his term expiring. These projections combined with growing uncertainty have severely diminished sterling's appeal and are likely to continue to weigh on the currency should they remain in the market.
