The US$ weakened overnight as the Europeans returned from their Easter holidays and resumed their exertion of downward pressure on the greenback. While the US$ has enjoyed a respite over the past several weeks, it seems that traders are now resuming their focus on the ever-widening interest rate differential gap between the US and the remainder of the industrialized world. As the market has adopted the belief that some stability is returning to US financial markets there is an ever-widening view that the US economy is in recession and likely to remain in that place for at least one more quarter. This view about an economic slowdown will likely contribute to an environment of low US interest rates for some time. The market will remain focused on the flow of US economic data to determine the extent of this US recession. At 9:00 a.m., the S&P/CaseShiller Home Index is to be released today expected to decline 10.5%. At 10:00 a.m., Consumer Confidence is to be released expected to decline to 73.5. Weakness in the US Consumer sector will further reinforce the view that the rates will move lower and that recession will prevail for some time, exerting continued downward pressure on the US$.
The euro gained overnight as traders refocused on interest rate differentials, moving away from the view that stability had returned to financial markets. As the US economy moves towards recession it seems likely that US rates will remain at current levels or push lower in the coming months. This interest rate position is being sharply contrasted with the ECB and its hawkish Chief Jean Claude Trichet. Trichet is slated to address the European Parliament tomorrow and is widely expected that he will maintain his position that anchoring inflation expectations remains his “highest priority.” This will almost certainly provide an upward bias to the euro over the next several months. However, extensive euro gains could ultimately be limited as traders begin to speculate about the prospect of market intervention by Central Banks. The G7 is scheduled to meet on April 12th and whispers continue to gain volume that some plan to bolster the US$ will be created.
The yen gained overnight as traders squared some short positions ahead of US economic data this morning and on the back of overall US$ weakness. However, the yen appears to be regaining its position in the “carry trade,” as evidenced by its movements yesterday, shadowing US equity markets. Also the yen has emerged in the “carry trade” surprisingly against the Icelandic Krona. The Central Bank of Iceland raised interest rates overnight to 15.0%, causing the currency to surge and further enhanced its position in the “carry trade.” Expect the yen’s fortunes to remain closely ties to the market’s appetite for risk, ultimately leading to wide trading ranges.
The pound gained overnight as traders refocus on the divergence in interest rates between the US and UK. With the US economy slowing and US rates likely to remain low for some time, investors have focused on the outlook for the UK rates. With rising inflation pressures and accelerating consumer spending, the Bank of England is unlikely to shift arts lower any time soon. This yield advantage continues to attract investors to the pound sterling.
