A tame inflation report helped the dollar recoup overnight losses heading into the data although it remains weaker on the day while higher on the week. The past several sessions have highlighted to investors a couple of key facts. First, surging commodity prices are firmly behind rising consumer and producer prices. Authorities nevertheless have limited control over ‘free markets’ to contain price increases. Second, demand is showing signs of weakening on several fronts in response to rising costs. Because of this grain of truth the dollar has found its wings as the still rising ascendancy of the Fed’s view that inflation won’t gain traction when caused primarily by transitory factors. It could be said that the world’s best hope of winning the battle against inflation comes from a reversal in the dollar’s multi-year weakness as more and more central bankers figure out that Bernanke & Co. had it right all along.
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U.S. Dollar – Commodities or hard assets are just about the best things to hold when the dollar is sinking since they retain their value. And because they retain their value, more and more speculators drive up those prices offering capital gains on top of an efficient hedge. Last week’s flop at the ECB, when it could be said its officials gave the impression that there is more to a policy decision than just inflation, has provided the dollar with a much-needed fillip. And you can’t have missed the ensuing liquidation of commodity prices creating simultaneous volatility and relief. The dollar suddenly found its role as safe haven once more and speculators inflicted with deep wounds as commodity traders headed for the same exit all at once are thinking twice about the guarantee that the Fed’s “extended period” will deliver weakness for the dollar. The April consumer price reading of an increase of 0.4% for the month or 0.2% if you strip out food and energy prices merely met expectations and left the yearly increase at 3.2% and 1.3% respectively. The dollar index recently traded unchanged on the session at 75.20 as investors look right through the transparency of the Fed and see a friendly face on the front of a dollar bill.
Euro – Rude health within the heart of the Eurozone saw first quarter GDP rise far faster than highly paid economists predicted. An expansion of 0.8% in the three months ending March was the fastest since the second quarter of 2010 and primarily driven by surging output in Germany and France. The data pushed the euro higher to $1.4339 at the day’s best level although the single unit has since lost its entire advance and traded in the red to as low as $1.4233. Still weighing on sentiment is the ongoing situation with Greece. The EU will reconvene next week to discuss what to do next to help Greece. The week’s headlines have been driven by strong hints notably from Germany that Greece must first help itself through ongoing austerity measures before its partners should reward it with more financial aid. In light of surging German and French growth within Friday’s data, I can only conclude that investors are more nervous about the reality of a debt default than they are optimistic about the EU’s ability to hold it all together in light of such a disastrous turn for the worse.
British pound – The pound suffered a decline against the euro as investors riddled with envy at the widening growth differential between the two continental economies sold the pound. The euro rose to buy 87.68 pence while the pound struggled to match the single currency’s performance with the dollar as it saw a daily loss build momentum in mid-morning Manhattan trading to $1.6251 and bordering on a fresh two-week low.
Japanese yen – The dollar faced a volatile session versus the Japanese unit. The yen strengthened on risk aversion grounds as European equity prices failed to move ahead reaching ¥80.34. U.S. consumer prices boosted demand for dollars lifting it to ¥80.94 before easing to equilibrium right in the middle of the daily range. The yen was also boosted overnight following an assessment from Chief Cabinet Secretary Yukio Adano who sized damages payable by Tokyo Electric in “the trillions.” His words sparked speculation that Tepco had embarked on a repatriation program to bring funds home for settling claims against it. Elsewhere another economic minster blames the yen’s most recent bout of strength on a weaker dollar as he attempted to diffuse the need to artificially weaken the domestic unit.
Aussie dollar – The Aussie traded both sides of unchanged in the face of a second weekly decline for Asian stocks. The MSCI Asia Pacific index ended the week with a net 1% decline. Dealers are still taking a candid approach to the high-yielding Aussie in light of an April employment report that saw employers unexpectedly cut full-time positions. The concern that a weaker labor market will offset the central bank’s desire to raise rates in order to counter inflation is currently hampering the Aussie and after demand for the greenback grew in to the weekend the unit is ending the week on a downbeat note at $1.0648 U.S. cents.
Canadian dollar – The Canadian dollar also lost a ding-dong battle with the greenback as the weight of evidence favored the U.S. unit as dealers squared books in to the weekend. With no economic data due north of the border the loonie lost a back and forth battle and recently bought $1.0334 U.S cents down from $1.0379 cents Thursday.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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