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The single European currency eased from its sessions high around 1.3269 following a favourable data release of US retail sales which showed the best reading in 3 months. A 1.2% rise in December vis-à-vis a 0.1% rise in November beat forecasts of a 1% rise.
The Dollar was also assisted by the ECB officials’ reiteration that Asian emerging market currencies need to be more flexible – a remark directed at China to revalue it’s currency’s long standing peg against the greenback.
Yen maintained its strength against the dollar and surged vis-à-vis the euro with Euro/JPY dropping briefly below the 135 mark.
The ECB preferred to keep their benchmark interest rates unchanged at 2% indicating that they were in no hurry to hike rates following an ease of inflationary pressures due to moderating crude oil prices.
The Fed funds 25 basis points advantage over the ECB rate remains intact.
Sterling surrendered its previous day’s gain against the dollar following the retail sales data as it plunged below the 1.88 mark.
In another significant but worrying development, crude prices surged above the $48 per barrel mark on increasing uncertainty over Iraq elections and supply disruptions.
The trade deficit in USA widened to a record figure of $60.3 billion as imports soared- mainly on account of the huge oil imports bill and exports fell, with most of the traders scurrying to increase their positions in Euro. China may now come under the US scanner and risks a backlash over it's currency peg, even though Japan, Canada and Europe are other trade partners also causing the chasm in trade figures.
A more than expected fall in oil inventories from US also added to dollar slipping and crude oil climbed to above $46.63 on NYMEX futures.
Gold climbed back to the $426 levels on a dollar sell-off across the board.
Eyes will now be reverted on today’s ECB meet on interest rates where the ECB president, Trichet may as usual, sound overly optimistic despite Euro’s strength hurting growth in E-12, though yesterday’s renewed gains in Euro may cause some worry lines.
Technically, for Euro a sustained holding above 1.3230 (10-day SMA) will likely open the door to the 1.3290 strata. Subsequent to that, more levels of resistance come in near the 20-day SMA slightly above 1.3390.
The dollar-yen pair faces support at 102.25 region with further gains for the Japanese currency opening doors till 101.90 levels.
A triple top formation on the GBP/USD charts (6-months), indicated a fall especially as one economic data after the other comes out bad from UK, but the US trade deficit has given some succour to sterling.
The Dollar held mostly in narrow ranges last night as the market was keenly awaiting the trade deficit figures scheduled for release this week to get a further direction. Last evening euro got a boost after impressive ZEW figures shot up to 26.9 from an expected 12.5 showing that there was growing optimism in the euro zone economy.
But the main driver of the day were the comments from EU chief economist Otmar Issing who stated that the single currency had already borne the brunt of the dollar’s fall and it was now Asian economies turn to let their currencies’ appreciate to share the burden.
Although it appeared that the comments were aimed at China but it was the Yen, which reacted, to these comments sharply by appreciating to early 103 levels.
It appears that the Japanese authorities are becoming less keen to intervene in the market as the economy adjusts to a stronger yen and as expected inflationary pressures seem to be on the uptick.
One of the biggest drops in the retail sales figures in UK failed to pin down the pound as it remained glued in its mid 1.87 levels with traders expecting trade figures from the country today which is expected to improve marginally.
The dollar lost ground to the major crosses after posting gains the previous week. Better than expected German Current Account figures helped the majors stage a relief rally against the dollar.
The figure of 11.9 billion euros, which was better than previous figures, fell short of market expectations of 12.5 billion. The figures ensured the euro heading back towards the 1.32 mark, with cable stabilizing around the 1.88 levels.
Sterling weakness continued in the light of further confirmations of stable inflation, declining consumer consumption and declining housing prices, confirming the sentiment has been short sterling contracts as traders price in a no rate hike probability for the first half of 2005.
Traders bid the yen higher close to the 104 levels, as market participants focus on the leading economic index in establishing any further direction.
A barrage of data releases lined up for the week ahead should make for an interesting development in the currency movements.
With the dollar in line with the US strong dollar policy and improvement in the show of data, markets are in for a further rally in the dollar.
The trigger required for the dollar strengthening was provided by the payrolls, which showed a rise of 55000 (from November) to 157,000 in December with the unemployment rate steady at 5.4%. Although the payroll rise came in about 20,000 less than expectations, they contributed to a 2.23 million rise in jobs for the whole year, the highest since 1999.
The dollar surged to a 5-week high against the euro and sterling and 3-week highs against the yen as the job figures further supported expectations of prolonged Fed tightening and higher yields in the US currency.
The euro ended the week 3.8% weaker or down 520 pips, its weakest performance against the dollar since its inception in 1999. The battle between US growth and deficit continues to unfold with growth clearly taking the reins this week.
Sterling, the other victim of the dollar rally, erased all gains made by an unexpected rise in UK housing prices.
Yen ended the week trading around the 104.70 levels, with traders now focusing mainly on developments from China’s monetary policy this week.
A statement by the Treasury Secretary Mr. Snow followed the positive data release reiterating the strong dollar policy being in the US interest, and more importantly the need to cut the budget deficit. The PPI figures and ZEW economic sentiment survey for the week should make for some more headway in the dollar rally.
