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Daily U.S. Forex Summary

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The US dollar is holding onto gains as the world economy weakens

Wed, Aug 13 2008, 05:38 GMT
by Union Bank of California Team

Union Bank of California

The US dollar is holding onto gains as the world economy weakens, despite higher oil prices and talk of new writedowns in the banking sector today. Oil prices began to rise today after BP shut down an oil pipeline in Georgia and continued fighting endangered supplies in the area. News that more borrowers with good credit are defaulting on their home loans making it even harder for the U.S. housing market to recover sparked a lower opening in the U.S. stock market this morning. Meanwhile, U.S. trade gap narrowed to $56.77 billion in June, surprising economists who expected an increase. Weak dollar helped boosted exports higher and overcame the effect of record-high prices for imported oil.
Despite a recent rally in the greenback, market players do not think a sustained U.S. recovery is imminent as a slump in U.S. housing and credit-market losses will keep the Federal Reserve from raising interest rates this year.

The Euro briefly tumbled below $1.49 against the U.S. dollar, triggered by bets the European Central Bank will leave rates unchanged at 4.25% in the near future, and worries that Europe’s economy could slow sharply. After the monetary policy meeting last Thursday, ECB President Jean-Claude Trichet said economic growth will be “particularly weak” in the coming months. Expect euro sentiment to remain weak in the near-term.

The British Pound Sterling extended losses below $1.90 against the U.S. dollar for the first time in two years as a poor U.K. growth outlook continue to hurt sentiment. Although U.K. annual consumer price inflation jumped 4.4 percent in July, exceeding forecasts for a 4.1 percent rise, the market focused more on sluggish retail sales and housing data. The data reduced chances of a near-term rate cut, given the central bank’s mandate to control inflation. Last Thursday, the Bank of England kept rates unchanged at 5.00%, citing dual dangers of slowing growth and rising inflation. Expect the pound sterling to remain weak.

The Japanese yen rebounded slightly on unwinding of carry trades. Talk of more financial woes today prompted investors to sell higher-yielding assets financed in Japan.

The Canadian dollar remains weak, hurt by lower oil prices since Canada is a key exporter of oil. For the past few weeks, the currency has been hammered by a stronger U.S. dollar, concerns about global growth, and a sharp drop in oil prices. Recent data have indicated a slowing economy. Gross domestic product, jobs, and housing data failed to meet expectations. News today that Canada’s June trade surplus was extremely wide in June provided some support to the Canadian currency. However export volumes were still low. Thus, any currency strength is expected to be temporary.

The Mexican peso extended losses against a stronger dollar as some investors doubt Mexico will hike interest rates as a U.S. slowdown was spreading to other countries. Mexico’s central bank authorities recently expressed their concern of a stronger peso hurting Mexican exports.

The Australian dollar was the worst performer, falling for the 11th day and skidded below $0.8800, hurt by softer commodities and fears of a global slowdown. However, losses were capped by news that the Reserve Bank of Australia raised its short-term inflation outlook on Monday, while its quarterly statement on monetary policy did not suggest aggressive rate cuts in September. However, at least a quarter-percentage point cut is expected at the September 2 meeting. The Aussie is expected to fall further as a cooling global economy will curb demand for commodities.

The New Zealand dollar sagged to 11 month-lows below $0.70. Falling commodity prices continue to push the New Zealand dollar down against a stronger greenback. This week, the market will eye second-quarter retail sales and housing data. Both the New Zealand and Aussie dollar will remain vulnerable to falling commodity prices.

Published on  Wed, Aug 13 2008, 05:40 GMT