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Weekly Update

The dollar continued its relative strength last week

Fri, Jun 20 2008, 09:50 GMT
by Union Bank of California Team

Union Bank of California

USD – The dollar continued its relative strength last week as markets anticipate an interest rate increase by the Federal Reserve—perhaps as early as August—in addition to rumors of coordinated central bank intervention in an attempt to prop up the currency. The Group of Eight summit of industrialized nations, which met in Osaka, Japan this weekend, discussed the damaging effects on commodity prices that have resulted from the weak dollar. Economic data continued to point in the direction of slow growth and moderate core inflation, as illustrated with the headline CPI data, which rose 0.5% m/m in May and a 0.2% increase for the core reading. May y/y increases were 3.9% and 2.3%, respectively. US Treasury Secretary Paulson, while addressing the G8 finance ministers, noted that a strong USD was in the global communities’ best interest, especially as it relates to souring commodity prices. Expect relative near-term strength for the greenback as speculation continues over US rate hikes.

EUR – The euro recouped some of its gains, rising to highs just below $1.55, after last weekend’s G-8 meeting concluded with no statement on currencies. The single currency fell sharply last week as US Federal Reserve Chairman Bernanke reiterated the Fed would be vigilant against inflation. The euro fell over 2 cents following his statements and continued its verbal exchange between US and European central bankers over potential rate hikes. ECB head Trichet has indicated he is ready to raise rates as soon as next month. Euro was also battered, reaching a low of $1.53, following defeat of the EU referendum in Ireland last week. With today’s Eurozone inflation report at an above-forecast of 3.7% in May, potential ECB rate hikes will be the main driver of the euro and keep the currency see-sawing as the imminence of rate hikes is speculated.

JPY – The yen began last week much as it finished the previous week. The currency remained under pressure as investors sought higher-yield investments funded by low-cost yen financing. Japan’s 5-year bond note lost the most in four weeks after Bernanke signaled the US Fed’s intentions to stave off inflation marking what may be increases in worldwide interest rates as commodity prices continue to post new record highs. Expect yen to remain under pressure as markets deal with further declining expectations and the minutes from the G-8 summit are dissected.

GBP – Sterling saw a fair amount of volatility last week ranging between $1.9751 and $1.9460 and only to finish the week at $1.9650. UK housing prices continued its precipitous decline approaching three-decade lows: the previous reading of 94.7 (declines vs. gains) from the Royal Institution of Chartered Surveyors for May was the lowest since 1978—the survey’s first reading. Banks approved the fewest home loans in at least nine years as lenders continue to tighten credit restrictions in response to massive bank write-downs due to sub-prime losses. Expect sterling to remain volatile as markets weigh inflationary risks amid a slowing UK economy.

CAD – The loonie rose against the greenback today amid some weak US data, but fell against most other major currencies as the market took the view that what's bad for the US is bad for Canada. While movements in the CAD recently have been dictated by the USD, some key domestic data later in the week could take over as the main driver. On Thursday, the CPI for May is due to be released, followed by retail sales data for April on Friday.

MXN – The peso continued its winning streak on Monday after it sharply rose late last week amid the robust US retail sales and tame inflation data, which diminished fears of a slowdown in the American economy that would put a crimp in Mexican exports. The domestic annual inflation rate accelerated to its fastest pace since late 2004 and may prompt Mexico’s Central Bank to raise interest rates when it meets this week.

CNY – The Chinese yuan continued its climb, rising to new highs at 6.9004. Markets are raising expectations for the pace of yuan appreciation following data last week that showed rising producer prices and higher import costs which are fueling inflation.

Last Week’s Currency Highs and Lows and Forecast

Published on  Fri, Jun 20 2008, 09:55 GMT

Archive

• This morning the USD rose to the highest level against the euro in almost seven months
  Published On Wed, Sep 3 2008, 06:48 GMT
• America's currency was back on the defensive again throughout most of last week
  Published On Tue, Aug 26 2008, 07:33 GMT
• America's currency extended its rally from the prior week
  Published On Tue, Aug 19 2008, 06:53 GMT
• Japan's currency continued a steady decline vs. USD on slowing domestic output
  Published On Tue, Aug 12 2008, 09:05 GMT
• Concerns of slowing growth in the Eurozone is putting pressure on the euro
  Published On Thu, Aug 7 2008, 07:51 GMT

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