The US$ fell across the board overnight as traders scaled back positions speculating that the Fed will hike interest rates over the next several months. Recent releases of consistently weak US economic data, particularly in the housing sector, has led to the reemergence of an overall negative outlook for the US economy. Adding to this pessimistic sentiment, Moody’s Investor Service stripped MBIA Inc. and Ambac Financial Corporation of their top investment-grade rankings late yesterday afternoon, further raising concern about future credit related writedowns. Both of these companies are critical in insuring bond deals against losses. This renewed sense of financial market trouble is weighing on the greenback. Further weighing on the dollar, crude oil spiked $2 overnight, as the prospect of an impending strike by Nigerian oil workers hit the market. This rebound comes after a $5.00 drop in prices yesterday fueled by the announcement by the Saudis of increased production. With the Fed scheduled to meet next Wednesday, June 25th, traders have significantly scaled back expectations of a policy shift from the US Central Bank. The market is currently pricing in a 12% chance that the Fed will hike interest rates by a quarter point at their June 25th meeting, down from a 22% probability one week ago. There is no economic data scheduled for release today, leading the market to be squarely focused on the Fed’s commentary next Wednesday and the overall negative tone of markets in general to steer the US$.
The euro gained significantly overnight as contrasting interest rate policies between the ECB and Fed prevail. It is all but certain that the ECB will hike interest rates by a quarter of a percent at its July 5th meeting as ECB President Trichet continues to voice his hawkish stance. Overnight Trichet stated, “Experience has shown that if inflation is left to creep up, the cost of bringing it down later will be even higher. The central bank must ultimately act if this what is needed to maintain price stability.” This succinct message underscores the ECB’s will to fight inflation, no matter the costs top economic growth. In addition, to underscore this growing inflation threat, Germany released PPI data overnight accelerating at the fastest pace in almost two years. With inflation pressures continuing throughout the Eurozone, higher rates will almost certainly continue to attract capital to the common currency.
The yen gained within recent ranges overnight as traders exited the “carry trade” overnight. Moodys Investors Service’s downgrade of both MBIA Inc. and Ambac Financial Corp. spurred fear of future writedowns in the financial sector and resulting turmoil in the financial markets. This has led to the prospect of a weak opening on Wall Street this morning, leading to further unwinding of the “carry trade.” The Japanese currency’s marginal gains were sustained by expectations that the Fed will be unable to hike interest rates in the near term, certainly to be reinforced by the US Central Bank’s commentary next week. In the interim, expect some modest yen strength within current ranges.
The pound settled into recent elevated ranges as the market looked to US$ weakness against other currencies and after sterling positive news yesterday. Thursday’s release of a much higher than expected UK retail sales figure coupled with a hawkish statement from BOE Governor, Mervyn King, led some traders to speculate that UK rates could soon be pushing higher. These expectations come despite weakness in the overall UK housing sector, as it seems almost certain the at the BOE will join their brothers at the ECB and adopt a staunch inflation fighting posture. This will almost certainly push sterling higher within recent ranges.
