US$ Better, But Falls Slightly After Inflation Data Lower than Forecasts
The US$ again rose overnight as traders focus on a bottoming US economy and the likelihood that the Federal Reserve has ceased its cycle of rate cuts. Comments yesterday from a slew of Fed officials all seem to assert that indeed US rates have ceased moving lower and now seemingly open the prospect of rate hikes later this year. Fed Governors Hoenig, Pianalto and Fischer each expressed concerns about inflation and rising prices. These comments have helped shift futures markets to forecast a 34.0% probability of a rate hike by the Fed’s September 16 meeting. This morning the market will shift its attention squarely to the release of CPI to gauge inflation levels in the US economy. CPI was released at a surprisingly weaker reading than many in the market had forecast, alleviating fears about runaway inflation and scaling back some interest rate expectations. CPI (ex food and energy) rose 0.2% month on month vs. expectations of a 0.3% reading. Year on year this data registered a 3.9% reading vs. expectations of 4.0% levels. These rather benign readings should relegate the US$ to its recent ranges and prevent any immediate rally.
The euro fell overnight as a perceived narrowing of interest rate differentials between the US and Eurozone coupled with comments from the French Finance Minister helped weigh on the common currency. With the Fed seemingly ending its cycle of rate cuts and the US economy showing signs of having bottomed, the market is now focused on Eurozone prospects. Recent economic indictors reveal that business confidence in France and Germany are beginning to wane as a strong euro and the effects of the global credit crunch are felt overseas. This has prompted many analysts to forecast that the ECB will be forced to abandon its inflation fighting policy stance and ease rates later this year, lessening the appeal of euro deposits. Also weighing on the euro overnight were comments from France’s Finance Minister Christine Lagarde who stated that she believes that the euro could be overvalued by as much 20.0% against the US$ on a fundamentals basis. These comments seem to assert the worries that Eurozone finance ministers are cultivating that the euro’s strength could contribute to significant economic malaise later this year.
The yen continues to remain under pressure as the Japanese currency remains the preferred financing vehicle for investors. As investors adopt more risk on to their balance sheets and into their portfolios amidst signs that the global credit crisis has eased, the yen has adopted a role as a proxy for this renewed risk. Expect this trend to continue for some time and with risk now being reentered into in the market, albeit cautiously, the yen will continue to remain under pressure.
The pound came under some modest pressure overnight after comments from the Bank of England Governor Mervyn King. King stated that the UK economy remains in a “fragile” state and that any further shocks to the system could push the economy to recession. He further stated that with inflation pushing above the Bank’s 3.0% inflation target, the scope of further interest rate cuts by the BOE is limited. These opposing comments will likely keep sterling in wide ranges fro some time.
