A Thursday morning rally in the dollar is not so much inspired by the every-other-day-excuse of rising risk aversion, but follows a minor improvement in the labor market according to weekly claims data. The FOMC minutes released a day earlier made it clear that a retirement party is in the works for quantitative easing, although no one seems prepared to call the caterer at this stage. Before the Fed can pop the champagne corks and streamline its balance sheet the minutes yesterday confirmed that official interest rates will likely rise, but that will come only after the Fed stops reinvesting maturing securities.
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U.S. Dollar – The dollar’s reversal from an earlier loss on Thursday is somewhat surprising. The Federal Reserve minutes of its April 26-27 meeting for the first time discussed an exit strategy and attempted to get its ducks in a logical row. Yet the timing of an exit remains elusive as suggested by the division on the FOMC. But its duel-mandate of low-inflation and full-employment is also facing the challenge of a sluggish labor market and certainly so outside of the manufacturing sector. A sharp fall to 409,000 for initial claims through last weekend seems to be the engineer behind the wheel for the dollar’s latest rip this morning. Ahead of the data its index fell to 75.22 but the fact that first time claims is once again tapping on the door at the critical 400,000 marker is likely to prompt dealers to perceive a faster rather than slower exit from quantitative easing. The bond market continued to weaken in response to the firmer reading adding fuel to the fire with long-term yields adding to the desire to hold dollars.
Japanese yen – The dollar rose most against other traditional risk safe havens such as the Swiss franc and the Japanese yen. A downwards revision to fourth quarter GDP and confirmation that the earthquake inflicted far greater damage on the domestic economy saw the yen swoon on Thursday. With three weeks of the first quarter hindered by a standstill in consumption and a halt across industrial and manufacturing output riddled by supply-chain disruptions the economy contracted by 0.9% and shrinking by 3.7% year-on-year. That reading is pretty much twice the size economists were afraid of. Dealers slashed their forecasts for the yen, although Goldman Sachs argued that the dollar’s prospects were more vulnerable to homegrown prospects. The investment banker reined in its predictions for the dollar, but maintained a view that the yen would still weaken. The dollar today rallied massively to reach ¥82.17 according to Interactive Brokers data as the yen weakened against the majors.