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Daily U.S. Forex Summary

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The US dollar hit seven−month highs against the yen

Thu, Aug 7 2008, 06:14 GMT
by Union Bank of California Team

Union Bank of California

The US dollar hit seven-month highs against the yen and held steady against the euro today. The Fed kept rates steady at 2% yesterday, as expected, with Dallas Fed President Richard Fisher being the sole policymaker to dissent in favor of a rate hike. The Fed showed concerns about weakness in the economy in their statement. This in turn helped the dollar against the yen as investors use the safe haven yen as a funding currency in US equities. Investors await tomorrow’s meeting of the European Central Bank, which is expected to hold interest rates at 4.25% after raising them last month.

The euro found support against the dollar and sterling ahead of the European Central Bank’s interest rate decision tomorrow. Investors expect that surging Euro Zone inflation will lead the ECB President Jean-Claude Trichet to maintain his hawkish stance on monetary policy. Many expect the ECB to keep rates unchanged in the coming months due to a slowdown in Euro Zone growth.
There were selling pressures on the euro earlier as German manufacturing orders data for June fell an unexpected 2.9%. The data stoked fears that there will be a sustained period of weakness in Europe’s biggest economy.

The British pound steadied against the dollar and slipped vs. the euro as traders adjusted positions ahead of Thursday’s UK interest rate decision. The Bank of England is caught between the dilemma of rising inflationary pressures amid a weakening economy. Most of the recent UK data show continued deterioration in the economy, giving the sterling limited upside as most analysts expect the BoE to keep rates steady at 5% for the rest of the year.

The Japanese yen weakened against the dollar and euro as stronger overseas equity markets boosted investor appetite for riskier assets.

The Australian dollar stayed near four-month lows against the dollar, as the currency is hit by sliding commodity prices and expectations of aggressive interest rate cuts. As a big exporter of net resources, Australia is particularly affected by a fall in commodity prices. The number of mortgages for home-occupiers fell 3.7% in June, showing the economy continues to weaken. Tomorrow’s employment report could prompt further selling pressures on the aussie if the jobless rate jumps toward 4.5%.

New Zealand dollar held steady today ahead of key jobs data due tomorrow, which could support the case for near-term interest rate cuts. Analysts expect second-quarter jobs data to show that the unemployment rate rose 3.8%, from 3.6% in the first quarter. Weakness in the jobs sector could lead the Reserve Bank of New Zealand to cut rates in order to bolster growth.

The Canadian dollar fell further against the dollar today as investors continue to leave the commodity-linked currency. A recent fall in commodity prices, including oil and base metals, weakened the loonie as Canada is the largest exporter of oil to the US and a net exporter of many key commodities.

The Mexican peso weakened sharply today as speculation the country’s central bank could intervene in the currency market to halt the peso’s recent appreciation. Since Mexico is an export heavy country, strengthening in the peso hurts the Mexican economy.

Published on  Thu, Aug 7 2008, 06:19 GMT