Dollar pares gains after strong retail sales data

Strong Asian market data and ongoing worries over Europe’s peripheral governments’ ability to raise money made for a poor start to trading for the euro. A German call for an EU bailout to help remove the strain facing Irish finances only underpinned a dollar whose economic data is increasingly viewed as improving. This week sees the release of key data covering inflation and retail sales activity. Supporting the greenback is the fact that bond yields have increased ever since the FOMC unveiled its latest bond-buying strategy. An early wave of dollar buying gave way to profit taking after the latest barometer of consumer health showed an unexpected surge in retail spending.

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U.S. Dollar – The dollar index is sitting at a six-week high lifted by signs that the economy has a minor amount of momentum behind it even ahead of a Fed strategy aimed at maintaining healthy lending conditions. More dollar bears are finding it hard to remain in the trees as evidence emerges that the pace of growth isn’t so bad after all, and that’s ahead of the central bank’s plans to further advance the recovery. Richmond Fed Chief Jeff Lacker speaking on Sunday did dollar bears no favors as he outlined his policy-formation thought process. Mr. Lacker warned that the Fed might soon have to think about raising monetary policy despite the fact that unemployment remains relatively high. If the U.S. wants to avoid a 1970’s-style inflation spike, remedial measures will have to be taken “in the not too distant future.” The dollar starts the week 0.5% higher at 78.50 for its strongest level since early October.

Japanese yen – The dollar strengthened most against the Japanese yen whose refuge was shunned after Tokyo data revealed a sharp strengthening in the pace of third quarter economic growth. Through the end of September the economy expanded at a quarterly pace of 0.9% for an annualized gain of 3.9% after gaining 1.5% in the year through June. The data blew past expectations of a modest economic improvement but did leave one mildly bleak spot behind. At 2% the GDP deflator fell by about a third more than expected although this symptom of Japanese economic malaise was trumped by the outright bout of heady growth. Elsewhere, Tokyo condominium sales jumped by almost 10% in October after a 3.9% increase in September, while industrial production declined by 1.6% for the month of September. Overall the data was pretty healthy and helped undermine the demand for the safety of the yen, which slumped to a session low at ¥83.22 and close to the (dollar) bullish flag objective I identified here on Thursday. The yen also slipped against the euro to ¥113.30 and against the Aussie to ¥81.91.

Euro – Statisticians rewrote the history books to leave Greece as holding the largest public deficit as a proportion of national output in 2009 grabbing the poison chalice from the hands of the Irish. EU Finance Ministers meet in Brussels on Tuesday amid media reports that Germany has proposed that Ireland takes a bailout. The Irish government meanwhile reiterates that its public finances, while in disarray, remain solvent and that it remains fully funded through the middle of next year. The euro continues to feel the weight of market suspicion surrounding the entire plight of peripheral governments and coincides with an inflection point in the pace of core Eurozone growth where data has now come off the boil. The euro eased to $1.3650 in early New York trading and fell against the pound to 84.78 pence.

British pound – The dollar’s strength extended against a British pound that outflanked its European rivals despite the latest sign of weakness in the housing market. A report from estate agent Rightmove showed that not only were more sellers stacking up to shift their homes, but that it was also taking longer to sell a house. Asking prices dropped 3.2% in November’s report making this the sharpest decline since December 2007. The report also noted that at 101.6 days it was taking the longest period of time since the survey began in 2001 to sell a home. The volume of unsold homes on estate agents’ books also rose to a record amid claims that the typical slowdown seen during the winter months had come earlier than usual. The pound trades slightly softer against the dollar at $1.6089.

Aussie dollar – The European story continues to weigh heavily on demand for the Aussie dollar. Investors had been relying on the relative yield of the Aussie to keep it bolstered above parity with the greenback, but it also appears that the fallout from Chinese ambitions to rein in its economy is dragging the Aussie lower. The weakness of the euro reminds investors that it’s not the right time to adopt a gung-ho approach to risk. Typically, such aversion weighs on high-yielders. Meanwhile, China has adopted several moves recently to cool various aspects of a growing economy. Having attempted to cool lending at its major banks by raising interest rates last week as well as increasing reserve requirements at some lenders, the authorities adopted more stringent measures to ensure foreigners don’t throw fuel on the real estate fire through buying more than one residence in China. The Aussie is currently trading higher against the dollar at 98.73 U.S. cents.

Canadian dollar – The loonie surged against its U.S. counterpart following signs of a rebound in the health of the American consumer. U.S. retail sales grew by 1.2% in October and faster than the predicted pace of 0.8%. The report is bullish for Canada given its close trade ties with the world’s largest economy meaning of course that the U.S. is Canada’s number one export destination. The local dollar surged to 99.22 after Monday’s report. Recent comments from Bank of Canada Governor Carney stated that there was a limit to how far the nations’ policies could diverge leading many to conclude that the central bank’s monetary policy ambitions might be on hold through the second quarter of 2011.

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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