Dollar maintains loans rate advantage towards a quiet week’s end

As expected yesterday, financial markets were decidedly subdued with the Thanksgiving holiday in the US. It has been a relatively quiet week this one compared to a reasonably volatile rest of November.

Interest rates have been a major driver of currency moves this year, with the rate gap between Japan & the Euro zone, and the United States seen widening further.

Following this morning’s Japanese CPI data showing only stable rises, the Bank of Japan are not likely to raise rates for a while so there is still the interest rate differential there to keep investors keen. The BoJ has kept money market rates near zero for the past four years.

Mervyn King was back in the spotlight yesterday as he testified in front of the Treasury Select Committee on the Inflation Report. His comments are very much on the fence, suggesting UK rates will remain on hold for the time being.

The next couple of months could be key for direction on interest rate moves into 2006, with the Bank of England keeping a keen eye on local economic data releases. At 9:30am this morning we have UK GDP figures for Q3 (2nd estimate); no surprises expected here with GDP growth likely to remain at 0.4% for the quarter, 1.6% for the year.

Yesterday morning’s German IFO business climate survey came in slightly weaker than expected which put some pressure on the Euro, pushing back over the 1.4600 mark against Sterling. On the European data front today we have…not much to be honest; focus already centres on next Thursday’s ECB Governing council meeting & rate announcement.

Dollar steadies, giving thanks to Thanksgiving

It’s a very quiet day expected on the markets today with the public holiday of Thanksgiving in the US. Volatility could remain muted moving into the weekend, with the national holiday in the States and traditionally quiet market action on Friday.

The Dollar will be looking for a well earned rest as it steadies itself before the European Central Bank meeting next week. Although markets expect a euro zone rate rise on December 1st, consensus is that this is unlikely to herald an extended tightening campaign by the ECB.

Along with this, the fact that the Bank of Japan is expected to keep their short term rates near zero until at least well into 2006, the Dollar rate advantage remains intact against the Euro and the Yen.

On the economic data front today, we do have the German November IFO business climate survey due at 9:00am GMT. Expectations are for the business climate index to improve to 99.5 from a reading of 98.7 in October. Improvements are expected in both current conditions and expectations. Anything above the likely result could lend to a slight rally in the Euro this morning.

As expected, yesterday’s November MPC minutes revealed a 9-0 vote to keep interest rates on hold in the UK. Moreover MPC member Walton (one of those who voted for a rate cut during the summer) gave a newspaper interview yesterday which focused on the risks of inflation to the UK economy; this reiterated sentiment in yesterday’s released minutes.

US Dollar focus continues

The Dollar slipped late in US trading yesterday as investors scrutinised the minutes of the Federal Reserve’s November 1st meeting. The minutes revealed that Fed Reserve policy makers agreed that the economy had shrugged off the impact of the summer’s hurricanes, leaving higher inflation as the biggest threat to the economic outlook.

The Greenback then extended its decline in Asian trade overnight as market focus moved into next year and a potential end to the Fed’s tightening cycle. The mixed signals out of the US continue, with these dovish minutes being in contrast to hawkish comments by a voting member of the Fed’s rate-setting committee next year, Jeffrey Lacker.

Lacker mentioned it was too soon to declare the Fed’s rate increases over, stressing that inflation remained a risk amid solid growth in the States. Are we any clearer on where the markets are heading now? That knowledge is as rare as pink diamonds.

On the economic data front today, we have UK MPC November meeting minutes due at 9:30am this morning; expectations here are for a unanimous decision to keep rates on hold this month. Investors will pour over the minutes for any indication of future rate movements.

MPC member Kate Barker mentioned in the media yesterday that the Bank of England viewed inflation in the UK as a major focus for them at the moment, echoing the similar comments from her counterparts in the US.

From across the Atlantic today, we will have the final reading of US Michigan sentiment for November due out mid-afternoon; an upward revision to 81.0 from the preliminary 79.9 is expected here.

At 1:15pm, it may be of interest to tune into ECB Chief Economist Issing’s speech from Brussels. Considering the recent market movement caused by rhetoric from ECB chief Jean-Claude Trichet, it’ll be a carefully worded speech from Herr Issing.

Trichet backtracks over euro rate rises

European Central Bank President Jean-Claude Trichet’s testimony to a European committee yesterday took the edge off a more hawkish stance from his comments last Friday when he said rates would rise moderately.

The ECB chief suggested yesterday that any upcoming interest rate rise would not necessarily herald an extended tightening cycle. The currency markets had been relatively range-bound for most of the morning until Trichet's words caused a definite stir and lead to understandable Euro weakening. Both Sterling and the US Dollar made back some gains lost late last week.

On the commodity front, gold touched on a 18-year high of $495.35 in Asian trade overnight, whilst oil prices edged up towards the $58 a barrel level as heating fuel demand increases. With record cold winters predicted across Europe in the coming months, this could soon put pressure on oil to push back over the $60 a barrel mark.

It is interesting to note that with the Greenback flexing it muscles at the moment and recording new highs against the other major currencies, that gold is also pushing to these new highs. Historically, when the big Dollar is strong, gold prices have weakened off. Vice versa, when the USD is weak, gold prices historically strengthen.

Economic data of interest this morning, the UK CBI November Industrial trends survey is due at 11:00 GMT, with expectations for confidence to improve slightly following recent softer oil prices and a weaker Pound.

The Federal Reserve minutes from their November 1st meeting are due out at 7:00pm GMT, with global traders looking closely at the rhetoric here for any clues on when the central bank will stop raising rates. US rates stand at 4.00% following 12 consecutive rate rises since June 2004.

Euro strengthens on rate rise expectations

The euro has put on its walking shoes and is on a march following comments from Trichet on Friday indicating that a rate hike could be as early as next week (Dec 1) given concerns about price stability.

Sterling lost immediate ground, a trend that continued throughout the weekend with US and Asian trade, as did the US dollar, however EURUSD has lost some of its steam as the market recognises that even if the ECB does raise its rates to 2.25%, the US Fed is also expected to raise on December 13, leaving the dollar with a continued, significant yield advantage.

The markets will get a fresh glimpse of the European economic conditions this week with release of the September trade balance figures as well as the IFO data from Germany. Consensus estimates are calling for a 0.3 bln euro surplus in trade balance after August deficit of 0.7 billion euro. November IFO figures are largely expected to remain at about the same levels.

Following last weeks renewed declines in manufacturing and housing we have a holiday-shortened week in the US. Position adjustment should provide support for the dollar with no real threat by the way of fundamentals to damage sentiment.

FOMC minutes to the November meeting will be a focus but are unlikely to show any signs of an end to their tightening cycle. November Michigan sentiment is expected to hold stable around the preliminary levels while claims should also stay low.

On Thursday, all major markets in the US will be closed in observance of Thanksgiving holiday. The US stock markets have particularly good reason to be thankful, with both S&P500 and the Nasdaq registering new four and a half year highs.

From the UK, GDP on Friday is expected to show an improvement in investment but the figure may be dragged back by continued weakness in manufacturing. Consumer spending also remains weak. Nominal spending growth is the lowest since 1967. The Bank of England reported fuel costs and a slowdown in housing as factors likely to inhibit recovery.