Specific and individual factors served to bolster one currency after another in Tuesday’s market against the greenback. However, a reversal of the positive start for equity trading has created growing demand for the dollar, which in one fell swoop has knocked over the arguments keeping the kingpins standing. Sentiment was sullied in a dull report showing a slide in housing starts and not much better on the horizon given the take away of building permits. The prospect of economic softness on the other side of June is currently playing in to the hands of the dollar.
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U.S. Dollar – Like a frightened possum, April housing starts rolled over and played dead, hit by a 10% monthly decline. Building permits – a forerunner of future activity – also slumped by 4% to a 551,000 pace confirming what we already know about the real estate market and keeping the economic shroud in place. Later this morning April industrial production is anticipated to have advanced for the sixth-straight month in a report from the Federal Reserve. Investors were dismayed by the lack of any rebound in the housing sector and as such took the shine off a spirited pre-market rebound in equity prices. The dollar index rose to 75.75 as dealers stocked up on dollars.
Euro – Italian central banker Mario Draghi was confirmed as ascendant to central bank chief when Trichet steps down in October. Ministers meeting in Brussels affirmed a bailout for Portugal and aired the notion that Greece might “reprofile” its debt schedule. That’s a posh way of saying that it might make sense to extend the maturity profile of its obligations. Such a move comes with prerequisites including the accord of existing bondholders and willingness by the government to make further cuts in spending and speed-up the process of selling off state-owned assets. The euro made a half-hearted challenge at Monday’s high, but having fallen short slipped like Bambi on ice into the red for the day versus the dollar trading lower at $1.4142.
British pound – Inflation returned to its highest in three years in Britain according to the April consumer price gauge. CPI jumped 1% during the month leaving prices rising at a 4.5% year-over-year pace. Those eternal interest rate bulls wishing for incrementally higher yields to compensate against rising prices drove the pound higher by a full cent following the report to as high as $1.6302. However, it’s comforting to read between the lines of Governor King’s open letter to Chancellor Osbourne and conclude that the bank of England remains at odds with such speculative fervor. “Although the impact on inflation of these factors is difficult to quantify with precision, it is likely that had they not occurred inflation would have been substantially lower and probably below the target,” King said. In light of the ailing health of the British economy and the fact that the largest wave of spending cuts since 1945 are just reporting for duty, Governor King sounds in no mood to be adding to the weight of struggling households and corporations by restricting monetary policy for the sake of beating back price increase set in motion by the government. The pound also fell back in to the red on the day before a bounce and recently bought $1.6210 against the dollar.
Japanese yen – Bank of Japan Governor Shirakawa described the health of the economy as being in “sever state” in an address to politicians in Tokyo. The government said it had asked for flexibility from the central bank in returning appropriate policy responses and said that the Bank would maintain a careful watch on developments in the foreign exchange market. The market took today’s cloaked warning of further monetary expansion along with a dip in consumer confidence last month as bearish for the yen and drove the dollar higher to ¥81.76.
Aussie dollar – Buyers of the Aussie dollar followed the same path as those driving the British pound higher. At the Reserve Bank’s latest meeting we learned that the central bank felt some upwards rate adjustment was likely necessary. The release of the official minutes confirmed that under certain circumstances the RBA would shift from its cozy 4.75% and self-described ‘mildly-restrictive’ stance on monetary policy. Those conditions infer a weakening of the exchange rate, which yet might at least delay a further monetary adjustment and at worst eradicate its need if the Aussie dollar’s strength kept inflation within target. The daily gain to as high as $1.0617 U.S. cents was gradually eroded as the unit slid all the way to $1.0537 before rebounding to $1.0561 cents.
Canadian dollar – Earlier confidence in equities and the thought of a rebound in commodities has turned to naught and at the same time weighed heavily on the domestic dollar. The Canadian unit got off to a bright start only to weaken as the morning wore on and currently buys $1.0233 U.S. cents.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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