Once again the dollar is taking a pounding midweek as economists soften their views over the health of the recovery. Of particular concern are developments in the labor and housing markets where frustrations are building over the length of time it will take to fully wind back the clock to before the financial crisis. The euro is today rallying sharply even though several central bankers have attempted to wade into the budding inflation debate in order to defuse some of the tension.
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Euro – With no Eurozone economic data to respond to in midweek trading, currency markets rounded up recent comments from ECB folk who have waded into the inflation debate. Last week President Trichet and council member Weber warned of medium-term threats to the inflation profile admittedly served up when December data breached the central bank’s inflation ceiling with a 2.2% jump. Weber yesterday noted that he expects medium-term inflation to remain below the ceiling and appeared to dumb down his comments of last week. Fellow member Nowotny underscored that the central bank had no need to alter its policy for the “foreseeable future,” while Orphanides also denied the Bank was trying to send an “overly hawkish” message pointing out that markets often like to over-think off the cuff remarks. But today’s attempt at softening earlier comments has failed to erase a gain in the euro, which earlier reached $1.3533 to trade at a two-month high. A rising euro has the potential to stifle export demand and could be harmful especially to cash-strapped nations feeling less of a recovery than in the core.
U.S. Dollar – December housing starts fell 4.3% from November and helped pull the rug from beneath the dollar this morning. Housing starts fell to an annualized pace of 529,000 units from 553,000 the prior month frustrating hopes for a recovery in the construction industry. Building permits, a forward looking indicator jumped to a higher than forecast reading of 635,000 to some extent countering the day’s bad news. However, the net effect was for a weakening of the dollar against a broad range of its major trading partners with the index down 0.8% to 78.35.
Japanese yen – The yen strengthened against the dollar to its highest since January 5 as demand for Asian alternatives to the greenback pushed the unit firmly towards ¥82.00 per dollar. Risk appetite continued to grow in the region as the Chinese once again permitted a strengthening in the yuan. Regional equities advanced buoyed by after-hours technology earnings in the U.S. The yen weakened against a rampant euro to trade at ¥111.00.
British pound – Swirling debate over inflation continues to raise questions over the line towed by the Bank of England. Data earlier in the week revealed a string of 10 inflation target breaches, admittedly brought on by rampant food and energy costs, but nevertheless alarming consumers faced with a rising cost of living. The pound rallied against the dollar dragged up by rising optimism over European sovereign debt while investors are sensing that the Bank of England might have to act at some point to counter price increases. The problem they face is whether to take such a firm tone with what they judge to be transitory price pressures at a time when growth is increasingly challenged by a round of budget-slicing spending cuts. The pound advanced to $1.6010 but eased against the euro, which buys 84.45 pence.
Aussie dollar – Demand for all things risky outweighed a slide in a widely-watched measure of sentiment lifting the local dollar well above parity with the dollar. A Westpac consumer confidence slid 5.7% to an index reading of 104.6 partly in response to concern over the economic outlook in light of the Queensland flooding. The Aussie buys $1.0054 U.S. cents following weaker U.S. housing data. The Aussie remained buoyant in advance of data due overnight likely to show a still-buoyant pace of GDP growth in China, its largest trading partner.
Canadian dollar – You can see a clear downwards spike upon the release of Wednesday’s U.S. housing data. We know well enough that the prospects for the Canadian economy are well and truly hitched to activity south of its border. At this week’s Bank of Canada monetary policy meeting the Bank sounded upbeat but sent a strong signal that further adjustments to policy must be carefully dissected. The loonie is likely to feel the pressure of its relationship with the dollar in the event the greenback weakens further as investors fear the diminishing afterglow of the recent rally in the dollar. The Canadian dollar today buys $1.0080 U.S. cents.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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