Libya's unintended chokehold on the price of crude oil slipped somewhat late on Thursday allowing investors to breathe easier. Stock markets around the world have rebounded at the end of the week and demand for the safe haven units of the yen and Swiss franc have consequently subsided. The reprieve has allowed the dollar to raise its head leading some to question its absence during a period of intense risk aversion.
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U.S. Dollar – This week’s 14% jump in the price of crude oil has dulled demand for riskier propositions on the assumption that economic growth would suffer. One securities house estimates the impact of a sustained $10 per barrel increase in the cost of oil to be a 0.5% reduction in U.S. growth. The dollar’s use as a safety haven has played a lesser role this week. Any economic contraction would least favor the U.S. consumer and discourage the Fed from changing its policy mix. The outlook for growth will be highlighted by a U.S. GDP report for the fourth quarter where investors anticipate an annualized pace of growth of 3.3% and firmer by a shade over the three months ending in September. The dollar index is currently marginally ahead at the end of a week in which it declined by around 1.5% to both the Swiss franc and Japanese yen as better safety valves as risk aversion mounted.
British pound – A downwardly revised fourth quarter reading for Britain’s output crystallized the matters of importance for the national economy. The central bank has been hearing pressure-a-plenty from all quarters over the need to tighten monetary policy. This week’s MPC minutes revealed a third call for a rate rise from one of the Bank’s own members responding to a fourteenth consecutive monthly breach of the Bank’s 2% inflation target. The downgrade to growth in today’s revised report alleviated some of that pressure as investors pondered the importance of growth over inflation as the key catalyst. The pound reached its lowest in a month per euro and recently traded at 85.70 pence, while it dropped sharply against the dollar to a session low at $1.6069.
Japanese yen – The yen strengthened against the dollar after inflation reports showed less intensity surrounding the nation’s struggle with deflation. A nationwide January reading showed the annualized CPI rate at zero for a second month, while stripping out the impact of fresh food and energy prices saw prices fall marginally less than forecast at a pace of 0.6%. The Tokyo CPI gauge missed predictions in a good way. An initial dip in the January reading was revised higher albeit to an unchanged pace while the February report also saw prices decline by less than expected at a 0.1% pace. Excluding fresh food and energy prices fell at an annualized pace of 0.3%. The yen rose to a session peak at ¥81.62 before losing favor amongst investors as the region’s stock markets rebounded. With short covering lifting the dollar to a slim gain on the day, the yen has once again risen and last traded at ¥81.75.