The U.S. dollar retraced some of its large gains from yesterday’s trading session as European equities rebounded and American stock futures foreshadow a higher open, sapping demand for the currency as a safe-haven. The greenback fell to a two-week low against the Canadian dollar as inflation accelerated to the fastest pace since September 2008, encouraging bets the Bank of Canada may resume boosting borrowing costs. The dollar fell the most against the Swedish Krona before tomorrow’s interest rate decision. The Riskbank, Sweden’s central bank, will raise its benchmark interest rate by 25 basis points to 1.75% at the conclusion of their meetings according to all 26 economists in a Bloomberg survey. Meanwhile, the U.S. economic docket showed that housing starts rebounded modestly in March after falling in February. Work began on 549K houses at an annual pace, up 7.2% from the prior month. Housing, which pushed the economy into the recession, remains the weak link in the recovery and continues to weigh on consumer spending.
The Euro rallied against the U.S. dollar as European stocks rebounded from their biggest drop in a month on strong corporate earnings, increasing demand for higher-yielding assets. The common currency also found support after a report showed German manufacturing growth unexpectedly accelerated, adding to speculation that the European Central Bank will raise interest rates further. Indeed, Germany’s purchasing managers’ index climbed to 61.7 from 60.9 in March, according to Markit Economics. European Central Bank Governing Council Member Nout Wellink said the central bank’s April 7th interest-rate increase sent to investors an “extremely important” signal aimed at preventing expectations of higher inflation. While Wellink didn’t explicitly ratify market forecasts that the ECB’s policy rate will rise an additional 50 basis points their year, he made it clear the central bank will keep inflation control its main policy goal.
The Japanese yen held its favorable range versus the U.S. dollar and higher-yielding currencies, as Asian equities remained lower. Meanwhile, Japan’s consumer confidence fell the most on record last month after the nation’s unprecedented earthquake, adding to signs the world’s third largest economy may contract this quarter. As the Japanese economy will likely remain weak throughout the year, many analysts believe the yen will weaken in the second half of the year. Indeed, in a research note Mizuho Corporate Bank Ltd. said Japan’s yen may depreciate more than 8.0% over the next year as the nation struggles to revive its economy and restrain a widening budget deficit.
The British pound rebounded slightly versus the U.S. dollar overnight as increased risk assumption weighed on the greenback. The pound also gained as wagers on interest-rate increases by the Bank of England rose for the first time in three days. The pound has traded in a 3% range over the past two months as investors continue to speculate whether more Bank of England officials will vote for tightening to contain inflation. U.K. consumer price inflation data for April will be published on May 17th. It unexpectedly slowed in March for the first time in eight months.
