US$ Moves Lower in the Wake of Trichet's Comments, Dollar Rally Likely to Continue
The US$ gained overnight against the euro, while remaining relatively flat against the British pound and falling against the Japanese yen. The recent uptick in investor confidence surrounding the U.S. economy helped the US$ to gain over 3.3% on and indexed basis over the past two weeks. Today, the market will focus on the commentary from the European Central Bank to determine the US$’s direction. A slight shift in policy will not only help the greenback gain against the euro, but also be indicative that the slowdown is continuing to effect other economies, particularly as the U.S. economy is showing signs of rebounding. Data on initial jobless claims for last week was released at 8:30 a.m. The data was expected to show 370,000 jobless claims, slightly down from the 380,000 claims the previous week. Weekly claims came in slightly lower than expected, at 365,000. Continuing claims held stead at 3,020K.
The euro was lower overnight as the market increased expectations that ECB President Jean Claude Trichet will change his commentary following today’s ECB meeting. The ECB decided this morning to hold interest rates steady at 4.00%. During his initial comments, ECB President Trichet stated that anchoring price expectations remains the “highest priority.” At the same time, Trichet noted that the main risk is a more negative impact from the market turmoil of recent months. In the initial stages, it does appear that his comments mimic a more balanced approach to inflation and economic growth, rather than the previous statements that chiefly focus on preventing higher inflation. Trichet’s comments will take some time to filter their way into the market; however, it does appear that he is not providing the market with anything that would reverse the euro’s recent declines.
The Japanese yen gained versus the US$ following yesterday’s equity market declines. As equity markets continue to trade in a range, the yen will likely follow in the same pattern. Though the trend is eroding, the main force behind current yen strength remains risk aversion within the market. Increased confidence for the future has helped the US$ gain from its lows; however, markets remain concerned overall with the present state of the economy. Low interest rates in Japan will help any renewed confidence spark a renewal of the carry trade, which should lead to yen weakness across the board.
The British pound gained overnight against the US$ as the Bank of England did not lower interest rates. While this was largely expected within the market, many became concerned in recent days that the erosion in data would cause the Bank to move. The BOE does not issue any comments when it leaves rates steady, so the market will have to wait for the release of the minutes before it will become apparent if any more rate cuts are imminent in the U.K. Until then, the prospect for further rate cuts is likely to be a prohibitive factor behind the British pound substantially strengthening.
