Euro tumbles as Trichet signals no change

The dollar built on earlier gains after news of continued improvement in the labor market and ahead of Friday’s first employment data for 2011. Having bid riskier units sharply higher as prospects for global recovery ran amok, investors are running out of reasons to punish the dollar where the underlying economy shows identical signs of acceleration. The only difference remains the attitude of various global central bankers leading investors to conclude that the last man standing by the punchbowl will be the Fed. The ECB President tripped up euro bulls optimistic that the central bank would respond to energy-fuelled price increases by saying that policy was appropriate but that above-target inflation would probably remain an unchecked pattern throughout 2011.

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U.S. Dollar – Initial jobless claims dipped by 42,000 through last weekend coming in on Thursday at 415,000 with the headline number edging back towards the 400,000 that had slowly become a line in the sand associated with labor market recuperation. The dollar stands 0.5% higher on an index basis against a basket of currencies at 77.51. Earlier in the week the dollar slid to its weakest in three months coincidental with a return to optimism in global stock markets. Later in the session investors will see if the service sector matched its December pace of expansion. The ISM services report covers 90% of the economy and at its current pace is roaring ahead at its fastest pace since May 2006. The dollar’s recent weakness has come not at the helm of a slower ship than any other major vessel, but on account of a resolute Fed willing to see through temporary challenges to inflation. At the same time, other central bankers fear that such rising prices will be allowed to feed into wage bargaining rounds forcing them to act early on monetary policy. From time-to-time the dollar is likely to become the obvious unit of choice and after a decline in its value like we’ve seen this week and ahead of Friday’s event, it looks like today could be a day when dollar bulls regroup.

Euro – The ECB left alone its record low benchmark short rate at 1% on Thursday and members of the press and investing community await further gems of wisdom at the ensuing press conference. On the last occasion President Trichet upset the applecart by focusing on the inflationary challenge that lay ahead whipping up a frenzy of pessimism that the central bank had imminent monetary tightening on its mind. Already consumer prices, rising at the fastest pace in two years, are above the central bank’s 2% ceiling and have investors worried that emergency measures will be unfrozen as early as the spring thaw. However, budget-busting governments around the region have simultaneously undertaken growth-reducing spending cuts, which is possibly likely to outweigh the need to chip away at monetary policy. January data today showed continued expansion in the Eurozone’s services sector, while December retailing activity disappointed by contracting 0.6% and declining for a second straight month. During the ECB’s press conference, the euro has fallen sharply against the dollar to $1.3675 wiping out midweek gains to as high as $1.3855.

British pound – The pound is also recoiling as the euro takes a post-game drubbing at the ECB conference and has turned south against the dollar. Earlier sterling was inspired by a return to expansion according to the January PMI services index, which reached 54.5. Against the dollar the unit hit another three-month high at $1.6276 before losing a penny to $1.6175. The fresh data continues to draw support to the argument that the Bank of England is going to have to act sooner rather than later in tightening up monetary policy. Many investors want to believe that story and see higher yields as a necessary evil propping up the pound. On the other hand, overall policy measures are only becoming tighter and will peak in the new fiscal year starting in April as spending and job cuts kick into action. The euro also fell by almost 1% against the pound as it tumbled to buy 85.50 pence.

Japanese yen – I noted yesterday that dollar weakness was perhaps starting to show signs of ending against the yen with rising lows falling in to place. That has so far held true and as the dollar advances in light of initial claims and euro weakness, it is also springing against the yen and currently buys ¥81.78.

Aussie dollar – A cyclone clobbered Australia delivering winds stronger than Hurricane Katrina when it slammed New Orleans in 2005. It’s hardly what the flooded nation currently needs and today Australia is once again gauging the impact on first quarter growth. The currency nevertheless remained buoyant in overnight trading as the growth story elsewhere took center stage with demand for Australian minerals showing no signs of deterioration according to a strong trade deficit report today. Elsewhere the number of building approvals across the economy jumped by 8.5% in December leading investors glowing that confidence continues to return to the building sector. The Aussie touches as high as $1.0145 overnight and remains buoyant in New York.

Canadian dollar – The Canadian dollar has felt the benefit from the uncertainty in the Middle East in the form of firming oil prices given the nation’s status as a major oil exporter. Today’s U.S. initial jobless claims report could have been bullish for the loonie, but a bid to the greenback as dealers dump the euro is making for a messy formation for the Canadian unit. The Canadian dollar today buys $1.0113 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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