Sentiment remains weak for the U.S. dollar as recent economic data point to a slowing U.S. economy. The U.S. dollar started to plunge after last week’s gross domestic data, the weakest in three years, rising at a 1.6% annual rate during the third quarter from a 2.6% in the second quarter. Yesterday, U.S. consumer confidence slipped to 105.4 in October and the National Association of Purchasing Management-Chicago business barometer fell to 53.5 from 62.1 in September. The market is now pricing a U.S. rate cut to 5% at the March 21 FOMC meeting. The market is waiting for this Friday’s important U.S. non-farm payroll report for further direction. Look for the U.S. currency to weaken further ahead of the employment report. The U.S. economy is expected to add 128,000 jobs in October compared to 78,000 jobs in September.
The euro is trading steady near $1.2765 as much of Europe is closed for the All Saints’ Day holiday. The euro is expected to remain upbeat from speculation that European Central Bank President Jean-Claude Trichet will remain vigilance against inflation. The ECB will meet tomorrow, but interest rates are expected to remain unchanged at 3.25% after five rate hikes since December. So far, growth in Europe is recovering. Look for the euro to extend gains if the ECB signals for additional interest rate hikes beyond the end of this year.
The Japanese yen is holding onto gains following weak U.S. economic data. The Bank of Japan reinforced that it will raise interest rates gradually. Growth in consumer prices have been tamed and core CPI rose 0.2% in September. The Bank of Japan will most likely not raise interest rates until inflation reaches 0.5%. Look for the yen to stay range bound as the Bank of Japan is not expected to raise interest rates before 2007.
Sterling remains strong on growing expectations that U.K. rates will be raised next year and next week to 5% to combat inflation. British house price data rising 0.7% in October firmed expectations of a rate hike. Look for the pound to stay strong ahead of next week’s Bank of England’s rate decision while a possibility of a U.S. rate cut next year.
The Canadian dollar weakened above $1.13 per U.S. dollar after the government said it plans to tax income-trust funds for the first time and raise dividend tax rates for foreign investors that own the trusts. The market is concern that these new tax rules would spur investors to invest elsewhere. The Canadian dollar will remain lifted by energy and metals prices. However, declines in equities and lower price of oil will probably spark a weaker Canadian currency next year.
The Chinese yuan rebounded after the International Monetary Fund said China should increase the currency’s flexibility and reduce its dependence on exports for economic growth. The yuan is still forecasted to appreciate as China is under pressure to cut its huge trade surpluses because a wide gap creates problems for the economy. Look for the yuan to continue to strengthen and possibly reach par with the Hong Kong dollar next year.
The Mexican peso and Mexican stocks continue to stay strong as local companies continue to post gains. Yesterday, it was reported that Mexico’s economy grew at around 4.5% in the third quarter, lower than 4.7% in the second quarter, but still growth is still considered healthy. Look for the peso to strengthen further as interest rates remain unchanged in the U.S.
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