Dollar weakens in anticipation of bad numbers

The dollar (NYBOT:DX) extended its streak of declines to the longest since April as economists forecast reports this week will show slowing factory output and a smaller gain in new home sales in the world’s largest economy.

The U.S. currency fell for the first time in three days versus the yen (CME:J6M14) after Federal Reserve Chair Janet Yellen last week said the central bank remains committed to low interest rates for a “considerable time.” Australia’s dollar jumped while New Zealand’s currency reached a six-week high after a report showed manufacturing in China improved more in June than analysts expected.

“The main trade continues to be long carry, long risk,” said Michael Sneyd, a London-based currency strategist at BNP Paribas SA, by phone from New York. “Despite the fact that U.S. yields are pushing higher, the dollar isn’t really gaining much traction.” Carry trades allow investors to profit from differences in interest rates. A long position is a bet that an asset will increase in value.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 of its major counterparts, declined 0.1% to 1,008.62 at 8:56 a.m. New York time. The gauge fell for a fourth day, the longest streak of losses since the period ending April 30.

The dollar weakened 0.2% to 101.87 yen. The U.S. currency was little changed at $1.3600 per euro. The shared currency depreciated 0.2% to 138.54 yen.
 

Yield Update
 

Yields on 10-year Treasuries rose for a third week last week. Yields fell two basis points, or 0.02 percentage point, to 2.59% today.

A Deutsche Bank AG measure of volatility was at 5.33% after dropping to 5.28% on June 19, the lowest close since August 2001. One-month implied volatility in dollar- yen was at 4.93% after touching 4.875% earlier. That matched the June 19 close which was the lowest since Bloomberg started compiling the data in December 1995.

Japan’s government is considering bringing forward cabinet approval of its growth strategy and basic economic plan to tomorrow from June 27, Kyodo News reported on June 19, citing a government source.

“Dollar-yen may break below the 200-day moving average and Japanese stocks may fall if the government’s renewed growth strategy disappoints,” said Toshiya Yamauchi, a senior analyst in Tokyo at Ueda Harlow Ltd., which provides margin-trading services. The average was 101.65 yen today.
 

Chinese Output
 

Most emerging-market currencies advanced after HSBC Holdings Plc and Markit Economics said today its preliminary Chinese manufacturing purchasing managers’ index rose to 50.8 this month, compared with analyst estimates for an increase to 49.7 from 49.4 in May.

Russia’s ruble (CME:R6N14) added 0.7%, while the South African rand (CME:T6N14) gained for a second day, rising 0.5% to 10.5950.

Australia’s dollar (CME:A6M14) surged 0.5% to 94.35 U.S. cents and reached 94.45 cents, the strongest since April 10. New Zealand’s currency climbed 0.3% to 87.25 U.S. cents after reaching 87.49, a level unseen since May 6. China is Australia and New Zealand’s biggest trading partner.

Today’s data on China “eased concerns about falling commodity demand, helping to boost currencies such as the Aussie,” said Nagayuki Yamagishi, a senior analyst in Tokyo at Money Square Japan Inc., a foreign-exchange broker. “As volatility remains low among the major currencies, higher- yielding currencies like the Aussie and kiwi tend to be bid.”
 

U.S. Manufacturing
 

The Markit Economics preliminary index of U.S. manufacturing slid to 56 this month from 56.4 in May, according to the median estimate of economists surveyed by Bloomberg News before today’s report. That would mean the number remained above the expansion-contraction line of 50.

A report tomorrow will show new home sales grew 1.6% in May from a 6.4% gain the previous month, and a June 25 report will indicate the U.S. economy shrank 1.8% in the first quarter, according to separate Bloomberg surveys of analysts. That’s a greater decline than the initial reading of a 1% contraction on May 29.

Yellen last week said banks’ reluctance to lend is holding back the housing recovery.

“The dollar appears to be reacting to the continued dovish overtones that are coming from Yellen,” said Jane Foley, a senior currency strategist at Rabobank International in London. “The message that U.S. rates won’t be hiked for a prolonged period is ringing loud and clear. Any return to dollar strength will be a slow grind.”

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