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.