Lesser worries over disruptions to the global growth scenario and hopes that sovereign woes may enhance the appeal of European government bonds to savvy yield-hungry Asian investors has the dollar on the back foot late in the week. The dollar meanwhile faced a bashing after the Commerce Department stuck with its low-beat assessment of growth in the three-months through March while initial claims data also disappointed investors. The dollar tumbled versus its major risk partners.
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U.S. Dollar – Comments from Minneapolis Fed President Kocherlakota yesterday failed to strike any chords of inspiration with dollar bulls. He again pointed to potential commencement of monetary tightening before the year in the event that the end of quantitative easing delivers its desired objectives. Perhaps economists have a hard time believing that his hope doesn’t jive with the still-lofty projection of 8.5% for year-end unemployment. The dollar index remains lower after an increase of 10,000 in initial claims data to 424,000 Thursday morning and has fallen almost 0.5% to 75.58 having reached 76.27 mid-week. A second round reading of first quarter GDP failed to improve on an earlier 1.8% pace of growth in the three months ending March.
British pound – Dollar weakness allowed the pound to build on a midweek advance following what could only be called a lame GDP report for the first quarter. The pound advanced to as high as $1.6333 in overnight trading before paring gains back towards $1.6300 ahead of the release of U.S. data. A CBI report today showed the impact of rising prices and a squeeze on British incomes with the consumer-services index for the three months through May falling to its weakest since November of 2009. The index fell to -23 from -11. Consumer spending fell to its lowest during the first quarter in two years according to government data. Consumer-services selling prices rose as did employee costs causing households to hold back spending according to the trade body. Within the business-services sector, hiring intentions rose to the highest since May 2008. The pound eased per euro to 86.84 pence.
Euro – The overall healthier tone to risk appetite on Thursday follows a report in today’s Financial Times, which cites the CEO at the European Financial Stability Facility as pushing the appeal of debt obligations from less well-off nations amongst Asian investors. Yesterday the EFSF issued €4.75 billion of bailout bonds on behalf of Portugal and according to EC data, 16% of the issue was bought by Asian investors. The next tranche in June will be keenly sought by Chinese buyers according to the article. China is already the largest holder of U.S. government debt and has been advised domestically to diversify its holdings. While there may be truth to the story and while there is likely room within Asian portfolios for higher-yielding peripheral paper, it must be noted that China has bought paper at lesser yields than where we stand today. In other words this exercise is ongoing and shouldn’t mark a turnaround for bond attitude as this is hardly a new factor. Nevertheless, buyers drove the euro back above $1.4200 in early going in New York below where it currently sits.
Canadian dollar – Crude oil is only marginally in the black on Thursday, yet this follows a couple of days of stronger rebounds that have lifted the price of a barrel of crude to $101.50 heading in to the start of U.S. driving season this weekend. However, the better tone to risk-taking met with a dip in the fortunes of the U.S. labor market and failed to encouraging dealers to put back growth-sensitive plays into their portfolios. The Canadian dollar weakened as a result and today buys $1.0205 U.S. cents.
Aussie dollar – The Aussie moved in the opposite direction partly due to rebounding Asian stocks but moreover on account of a greater than hoped for increase in capital expenditure during the first quarter, where investment projects accelerated by a 3.4% clip. The Aussie was dragged higher by rising commodity prices after a 1.6% gain for the CRB index midweek, while building on that theme, RBA Deputy Governor Ric Battellino noted that the health of the Aussie was a reflection of “strong global growth” as demand for Australian natural resources remained firm. The Aussie is close to its session high and recently traded at $1.0600 U.S. cents.
Japanese yen –Shortly after the dull U.S. GDP and initial claims data the yen surged versus the dollar reversing weakness earlier in the session from ¥82.02 to ¥81.15. Selling pressure mounted after the dollar broke through the daily low but escalated to drive the pair through even Monday’s low for dollar/yen.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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