Sterling rates up on weak dollar news

The US dollar remained weaker against sterling and the euro on the back of a slew of negative factors including speculation European interest rates may be raised, weak US September durable goods orders, and concerns about the health of US corporations.

A busy day ahead as all focus on US third-quarter GDP data due out this afternoon and euro-zone CPI inflation released this morning.

Yesterday, orders for new U.S. durable goods fell 2.1% in September, pointing to relative weakness in the manufacturing sector. The number was below consensus forecast, however some of that disappointment was mitigated by upward revisions to the previous month's numbers.

September New Home Sales came in below consensus projections at 1.222 million compared to the estimates of 1.250 million. A more telling aspect of the data was the 3.2% downward revision of the August figure - 1.237 million - to a new 10-month low of 1.197 million. Rising costs of supplies and higher interest rates are contributing to the decline while further underpinning concerns for a peak in the housing market, with any slowdown subsequently seen as hindering to consumer expenditures.

EURUSD broke above key technical levels around $1.2140-50 - 38% retracement of the 1.2583 to $1.1874 decline as well as the 100 day moving average, as did cable, breaking through the 100-day moving average at 1.7850

The market today will be looking at euro-zone October CPI data, which is expected to stabilize below last month's reading of 2.6% at 2.4%. Considering ECB's preferred ceiling of 2.0% as well as this week's strength in IFO surveys, the figures should shed more light on the possibility of Eurozone interest rate tightening.

Currency money rates spooked by markets

The US dollar was split, trading at two year highs against the yen but softer against Europe with cable breaking back through the 1.78 level with little fresh economic data.

The Japanese yen is under pressure following a further reduction in Japan's merchandise trade surplus in September. The weakening yen has surprised the market in H2 with levels of 120 plus coming into focus following the breakout of the key 116 resistance level.

Japanese retail sales rose 0.1% in September from a year earlier, far short of a median market forecast for a 1.8% rise, suggesting that consumer demand may be slowing after leading Japan's economic recovery since the start of the year. The move was also assisted by Japanese banks driving the euro toward stops above 140.00 yen.

The dollar traded weaker against both the euro and sterling, plagued by rumours that General Motors is seeking bankruptcy protection. The rumour reportedly stemmed from reports that US regulators are looking into General Motors Corp's pension accounts and transactions with bankrupt parts maker, Delphi Corp.

A GM spokesman was later reported by newswires as saying the rumors were "untrue" and the news then changed to the possibility GM could be investigated for its accounting practices accelerated selling in the U.S. currency. GM said it had been subpoenaed by the U.S. Securities and Exchange Commission as part of a probe into its accounting practices and other matters.
Fighting this, the dollar still seems to be protected by familiar expectations of rising interest rates, beginning next Tuesday with a hike in the fed funds rate to 4.00% from 3.75%.

Money rates weaken on gloomy news

The dollar was punished across the board on a combination of slumping consumer confidence in the US and higher than expected business confidence in Germany. The dollar lost more than 1.5 cents against the euro hitting a week low.

Hawkish comments from Mervyn King in late European trade further cemented dollar’s losses as the bond market shifted on the back of King’s address to the House of Lords economic affairs committee.

Mervyn King insisted that “the wheels were not coming off” the economy, although it was driving along a “slightly bumpier road”.

King confirmed his view that official figures may not be giving a true representation of economic activity and any negative comments surrounding the economy are taking root from weakness concentrated mainly in the retail sector whereas we are still enjoying a healthy level of employment. On the back of these comments, it seems even more unlikely that we will be seeing any further rate cuts from the MPC in November.

King also went on to play down any concerns over divisions within the MPC after he was outvoted at the August meeting when the majority of the MPC favoured a 0.25% cut in interest rates.

In addition, ECB Governing Council member Axel Weber said on Tuesday that the central bank was on high alert for inflation dangers although it was not preparing for an imminent rate rise, adding further fuel to the EURUSD fire.

The euro gained more than 150 pips against the dollar following a 2.7 rise in the Oct IFO's climate Index to 98.7 - the highest in 5 years. The situation index increased 2.5 points to 98.9 while the expectations index soared by 3 points. The survey was conducted after the resolution in this month's election, which led to better clarity as to how power will be divided in Germany.

We saw last week how the Oct ZEW Indicator of Economic Sentiment rose following the resolution in the election. Whether the rebound in the indices reflects a relative improvement after the election or is a greater showing of economic expansion remains to be seen. The IFO climate index is now standing above its 7 year average of 94.1.

Dollar increases currency rates gains

Bush, yesterday, nominated Ben Bernanke, a leading monetary policy expert, to replace Alan Greenspan as chairman of the Federal Reserve at the end of January next year.

The dollar opened this morning slightly weaker, on the back of the nomination of Bernanke and a move not helped by the three bomb blasts in Baghdad. Going forward reaction should be positive due to Bernanke's experience at the Fed as well as his intellectual capacity. His adherence to inflation targeting, however, has mixed prospects for the currency.

At the outset, pursuing explicit inflation targeting policy could deprive the Federal Reserve of its multi pronged policy of using an array of inflation-related figures at the prices and wages level. If a Bernanke led Fed adopts a more clear cut inflation target, then it could run the risk of over focusing on inflation at the possible expense of overlooking the Fed's objectives of maximum employment and stable prices.

In the event that core inflation continues to threaten the 2.0% figure, then we can expect a positive dollar reaction on the grounds of further Fed tightening. But in the event of the disinflationary or deflationary conditions such as in 2003, the dollar is more likely to be facing downward pressure.

Dollar forex rates increases

Despite a bout of consolidation, the dollar gained around 1 percent against the euro last week and held familiar ground against sterling, driven largely by interest rate speculation.

The dollar found added support on Friday from several investment banks raising their forecasts for the peak in US official interest rates, and upgrading their US dollar forecasts in response to the International Monetary Fund chief, Rodrigo Rato, stating that the US Federal Reserve should continue to increase rates gradually.

The Fed has raised its benchmark interest rate at 11 successive meetings since June 2004, taking it to 3.75 percent, and many economists expect it to raise rates twice more this year to 4.25 percent, and probably more next year.

Still, some see chances increasing that the euro zone will raise rates, which would erode the dollar's rate advantage. ECB chief economist Otmar Issing said on Friday that central banks have to be "extremely vigilant" against inflation, prompting speculation that the ECB may raise rates sooner than later and giving the euro some support. That was followed later in the day, however, by ECB President Jean-Claude Trichet's comment that current interest rates were still appropriate.