Just when everyone has turned bearish on the U.S. dollar, it has its eyes set on the strongest level since the day the FOMC announced quantitative easing. Since then investors turned medium-term bearish according to a Bloomberg poll and expect the Fed’s printing press approach to dilute the dollar and detract from its appetite. The only problem is with the dollar today rallying to $1.3130 against the euro, is that weakness in core economic data is proving that quantitative easing is needed to a larger and longer degree than perhaps first expected, while it will also need to be adopted by the European Central Bank, which of course detracts from the dollar’s first alternative.
Stock markets continue to reel from weakness in U.S. consumption habits and the bears are telling the bulls to rein in their horns with their premature optimism built on fear of missing the rally more so than on hard data. The turnaround has softened commodity prices and undermined the appeal for riskier assets and in turn currencies in emerging and commodity sensitive markets.
The dollar is gaining the upper hand against the yen, which has outpaced the euro in the past two sessions. The growing reluctance to join the rising tide of equities had initially boosted the Japanese unit testing the recent dollar upswing. Today the dollar buys ¥99.50 from ¥98.92 yesterday while the euro, which earlier slipped beneath ¥130 currently buys ¥131.17.
Hope springs eternal for the fortunes of the British pound, which has also gained against the Japanese yen. Today it is up to ¥149.05 from ¥147.40 on Tuesday. A smaller number of British surveyors in the key RICS survey depicted 73.1% reporting lower house prices in March compared to 78% in February. Hardly cause for cracking out the champagne, but in addition to an increase in the February reading of mortgage approvals, optimists take this information as a sign of stability. With this still rather negative take on price declines, we still think it’s hard to understand how the Nationwide recently reported the first bump up in house prices in 18 months.
Still, the pound is shrugging off the weakness in the U.S. data as investors appear happy to move back into sterling. The pound stretched through $1.50 for the first time since January today while recording a five-week peak against the euro where today one euro buys 87.95 pennies from 89.02 on Tuesday.
Commodity dollars are rebounding today, perhaps due to a slightly reading for U.S. stocks at the open. The Aussie unit fell to 71.50 against the dollar after a Westpac Banking and Melbourne Institute survey of future economic activity fell at a 5.1% annualized pace and the fastest decline since 1982. But since then the Aussie has dusted itself off paring the decline and is now at 72.12 U.S. cents. The Canadian dollar is strengthening and is closing in on Tuesday’s high – the strongest level since late in January – at 82.66 U.S. cents.
Today’s U.S. data continued to poke holes in the rebound theory with capacity utilization at domestic manufacturers at a record low of 69.3% as industrial production slipped 1.5% on the month. Meanwhile, compounding weakness in retail sales, consumer prices slipped on a year-over-year basis for the first time since the ‘fifties falling by 0.4% since March 2008. Excluding the volatile food and energy data, annual prices rose 0.8% from a year ago.
