US$ Falls Against Euro and Sterling, Rises Against Yen
The US$ gained against the yen and euro overnight while steadying against the pound amidst speculation that the worst is over for the US economic downturn and that the Fed has ceased its cycle of rate cutting. The market will certainly be watching the flow of US economic data this week to determine if these assumptions can be justified. There is no data slated for release today, while tomorrow sees the release of Import Prices and Retail Sales. Wednesday yields the release of CPI, while Thursday yields Weekly Claims, Empire Manufacturing, TICS data and Industrial Production and Capacity Utilization. Friday yields the release of housing starts and Michigan Confidence. Should this data prove resilient and in line with forecasts, it is likely that we will see the greenback continue to make significant headway across the board.
The euro continues to push lower against the US$ as signs seem to be emerging that the major Eurozone economies are showing signs of a slowdown, which could ultimately lead to some policy shift at the ECB. Recent indicators showing declines in business confidence in both France and Germany show that the economic malaise hampering the US for the last two quarters seems to be spreading to the Eurozone. This has led traders to speculate that the recent hawkish tone of the ECB surrounding interest rate policy will be altered as a slowdown encompasses the major economies of the Eurozone. With speculation emerging that rates could be pushing lower within Europe as the Fed steadies US policy, the appeal of Eurozone assets diminishes, likely to continue to weigh on the euro for some time.
The yen continues to steady in ranges as traders tepidly add risk to their balance sheets. With the yen remaining the preferred vehicle to finance positions across a broad spectrum of markets, via the “carry trade,” as market risk appetite ebbs and flows so do the fortunes of the Japanese currency. News last week from US insurance giant AIG that it was marking a significantly larger loss than had been forecast reignited fears that additional credit risk remains in the market. Until markets seemingly settle, the yen will continue to remain relegated to these ranges.
The pound rallied overnight after the release of data showed that UK producer prices surged in April, prompting traders to scale back bets that the Bank of England will move aggressively to cut rates. This has led traders to buy the pound as the likelihood of UK interest rates remaining amongst the highest in the G7 will prevails for some time given this acceleration in inflation pressures.
