The U.S. dollar plunged to 3-week lows following a lower than expected January US ISM Manufacturing index released today showed contraction in the manufacturing sector. The dollar slipped as investors focused on unwinding positions ahead of the U.S. payrolls report on Friday and a Group of Seven rich nations meeting next week. U.S. core inflation data for December, stripping out food and energy costs, provided no inspiration for the market. This report is viewed as the Federal Reserve's favored gauge of inflation, rose 0.1% in December. The dollar failed to move substantially after the Fed held its benchmark overnight interest rate steady as expected on Wednesday and maintained a warning on inflation risks. It also said inflation pressures were likely to moderate and further tightening of monetary policy may be needed depending on the inflation and economic outlook.
The euro strengthened slightly this morning on the back of weaker than expected economic data out of the U.S., despite a euro zone manufacturing survey which showed the region's overall factory growth unexpectedly slowed to its weakest in 11 months, although manufacturers raised prices at their fastest pace in at least 4 years. Europe's hopes of engineering a rise in the yen against the euro ran into trouble on Thursday, after Washington decried interventionist rhetoric and said the Japanese currency simply reflected economic fundamentals. U.S. Treasury Secretary Henry Paulson delivered a blow to Europe's objectives on Wednesday, saying the yen was a freely traded currency that was weak for understandable reasons, low interest rates in a country shaking off years of deflation. That will ring in the ears of the three euro zone nations in the G7 after several weeks of mounting complaints over the yen's drop to record lows against the euro, which is making life tough for European exporters.
The Japanese yen remained steady against the U.S. dollar as speculation intensified that G7 finance chiefs might discuss yen weakness at next week's meeting, which could prompt broad buying in the Japanese currency. The message has been mixed with EU members pushing yen discussions at G7 and Japan and the U.S. commenting that currency movements should be left to the markets. Hiroshi Watanabe, Japan's main official on currency issues as vice finance minister for international affairs, said the yen was unlikely to be a focus of the Essen talks even if it was mentioned by some G7 members, and he said the matter was for markets. Bank of Japan Governor Toshihiko Fukui on Thursday highlighted continuing weakness in wage growth, one of the main obstacles to a clean break with deflation, saying mixed economic reports had justified last month's decision not to raise rates.
The British pound steadied against the dollar, having tested key support levels in recent days, with investors looking to British manufacturing data for further insight on the interest rate outlook. Economists expect January's manufacturing purchasing managers' index to come in at 51.7, from 51.9 in December, with the sector seeing another month of slower growth. Analysts believe such data, added to recent softer than expected housing data, could scale back expectations for monetary tightening after January's surprise Bank of England interest rate rise to 5.25%.
The Canadian dollar steadied this morning against the USD though it disappointed markets as it wasn’t able to capitalize on the weaker than expected US data. The loonie remains an underperformer after yesterday's dismal GDP report. The data showed the Canadian economy grew a weaker than expected 0.2 percent in November.
The Australian dollar rose slightly off a two-month low, ending a six-session losing streak after yesterday’s comments by the Federal Reserve proved less hawkish than many investors had expected. Australia posts its December trade balance on Friday, with the deficit expected to widen to AUD1 billion from AUD843 million in November. Domestic reports next week include retail sales, building approvals, employment and housing finance.
The New Zealand dollar remained just above 3-week lows on Thursday after a brief rally following the Federal Reserve's policy statement ran out of steam and more bearish sentiment prevailed. The kiwi is seen as being a bit fragile with some wariness about carry trades and the G7 meeting next week. The main driver for the NZ dollar's recent weakness appeared to be less certainty that the Reserve Bank of NZ would raise interest rates next month. Next week will see fourth quarter NZ wages and employment data.
The Mexican peso rallied against the dollar in early dealings on Thursday as investors expressed less worry less about inflation in the United States. Mexico’s central bank left monetary policy unchanged at its monthly review last Friday, as expected, but warned it would increase interest rates if a recent acceleration in inflation did not slow on its own.
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