Dollar boosted by initial claims data

Strength in a measure of core European manufacturing growth today bolstered the euro against the dollar highlighting the doubt over any further need to stimulate the economies of the Eurozone. A growth-check in China also led investors to conclude that the authorities there may need to step up their efforts to cool the economy further. The twin events leave the dollar once again batting on the back-foot this morning just hours ahead of a G20 meeting where investors are hoping that consensus will lead to a statement indicating that devaluation must and will be avoided. Early morning jobless claims data has disappointed dollar bears and a short-covering wave of dollar buying is underway.

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Aussie dollar – The Aussie struggled overnight following several pieces of Chinese data crossing the wire, each indicating an economy that may need further measures to cool its heady pace of growth. The unit slipped to as low as 98.06 U.S. cents before recovering in New York trading to 98.67 cents. Third quarter Chinese growth of 9.6% was accompanied by rising consumer prices, which returned to a two-year high at 3.6%. Doubtless the Peoples Bank read this data earlier in the week before committing to raise deposit and lending rates by 25 basis points. And while the pace of growth did cool, other data indicates a still robust picture of health. Industrial production grew at 13.3% year-on-year while data showed retail sales in September was up 18.8% on the same time a year ago. Fixed asset investment was up by around 25%. Further measures may well be needed to rein in the world’s number two economy, which is a deterrent for holders of the Aussie dollar since the Chinese economy is Australia’s biggest customer.

U.S. Dollar – Treasury Secretary Geithner told the WSJ in an interview published today that China can clearly afford to allow its currency to strengthen against the dollar. Today’s third quarter growth data vilifies his position. Meanwhile divergent bond prices between Europe and the United States are increasingly weighing against the dollar with investors clearly bringing forward the day the ECB will turn its back on efforts to stimulate the economy. The dollar index measuring the value of the dollar against a basket of trading partners slipped 0.3% to stand at 76.97. Later this morning the Conference Board releases its leading indicator for the world’s largest economy and is likely to predict continued growth into 2011. The dollar turned, however, following Thursday’s initial jobless claims data showing a 23,000 drop in the claimant count to 452,000. However, the previous week’s data was revised sharply higher meaning that today’s number only came in where forecasters had projected.

British pound – The reality of further quantitative easing is starting to hit home and is having a negative impact on the value of the British pound. Today the unit slipped to a six-month low against the euro at 88.85 pence, while a midweek rally against the dollar is fast-fading to leave sterling buying $1.5745. The detail on the previously announced spending cuts didn’t leave much room for error and investors are now beginning to realize the impact of the austerity package. All eyes are once again slowly turning to the role of monetary policy as the savior for the economy, which is precisely where the MPC has already arrived. Weighing on the currency today was a drop in the September measure of retail activity where sales dipped 0.2% on the month leaving sales up just 0.5% year-on-year. Mortgage approvals amongst major banking lenders numbered 44,000 in September leaving them running at the weakest pace in 17-months.

Japanese yen – The yen gained in early trading against the dollar to stand at less than ¥81.00 but during a broad-based dollar rally shortly after the release of U.S. initial claims data the unit weakened to ¥81.25.

Euro – The euro earlier tested $1.4050 after a surprise rise in Eurozone manufacturing data according to the October PMI survey reading, which rose to 54.1 from 53.7 in September. Both the composite and services elements continued to come off higher levels. German data was especially strong and bucked expectations of a further cooling and indicates that foreigners have limited issue with a rising euro. French PMI data cooled somewhat yet still indicated a healthy level of expansion in both services and manufacturing. The euro has subsequently dipped to $1.3986 and also buys ¥113.61.

Canadian dollar – Bank of Canada Governor Carney yesterday predicted continued buying of the domestic dollar at the expense of the greenback as currency wars maintain a presence. He noted the impact of a stronger currency on the domestic economy, which was a view that emerged earlier this week from the central bank’s monetary meeting. This week interest rates were left on hold in part owing to the artificial tightening of monetary conditions as a result of a stronger Canadian dollar. The unit continued to rally today and buys 97.82 U.S. cents.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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