The decline in activity at U.S. retailers wasn’t as bad as analysts had braced themselves for while ever-strong activity in China has provided some relief on Tuesday with investors keen to leave behind risk aversion while embracing risk appetite. Earlier weakness in the dollar has been derailed by a jump in the greenback against its typical risk adversaries of the Swiss franc and Japanese yen. The Swiss revised down growth blaming the strong franc, while the Japanese announced a new loan program aimed at reviving the moribund economy.
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U.S. Dollar – Retail sales slipped by just 0.2% in May while April’s gain was revised lower. Overall investors seem willing to read the headline number as a sign of relief that the consumer still has a pulse. Stripping out sales of autos and gasoline, consumer spending rose by 0.3%. Producer prices rose by a little more than hoped for although excluding the volatile components of food and energy prices were no worse than expected. The dollar got off to a rough start with risk aversion moving to backstage following strong reports for industrial production and retail sales. During the European session the dollar basket slipped to 74.28 as investors bought riskier assets around the world, sacrificing the dollar as a funding unit, before it rebounded following the release of Tuesday’s data. At 74.50 the dollar index is about unchanged.
Euro – The euro rose in a session void of economic data while investors remain in suspense as they await the outcome of today’s meeting among leaders who attempt to find a solution to the Greek debt issue. Lawmakers from Germany are pushing for a legitimization of default as they attempt to coerce private bondholders to accept an extension of maturities. The European Central Bank recognizes that by doing so would open up a can of worms at the ratings agencies creating further problems down the road, not to mention the potential for a fresh banking crisis. The euro rose against the dollar to a daily peak at $1.4472 as risk appetite grew while after the release of U.S. data it pared its advance to $1.4428.
Japanese yen – The Bank of Japan accompanied its unchanged policy stance with the announcement of a two-year program of loans at the discount rate of 0.1% in an effort to revitalize manufacturing after the earthquake and tsunami in March. Governor Shirakawa sounded remarkably upbeat claiming that he was optimistic about the longer-term prospects of recovery, while admitting that the key now is the pace of recovery one supply constraints have been dealt with. The ¥500 billion loan program is a shot in the arm for the nation and has helped temper the recent gains for the Japanese yen, which fell to ¥80.56 after U.S. data.