Greetings MTF readers. Here is the weekly FOREX wrap up for the week ending on Friday May 30th 2008. The US dollar continued it’s rise against the euro for the second consecutive month now. It did fall a bit on Friday against the euro as some investors sold the US currency after the string of recent gains. This was the first back to back monthly gain since January 2007 for the dollar. The euro zone common currency headed for a second consecutive month of declines against the greenback.
Demand for the US greenback has increased recently as oil prices eased from record highs and US government data showed only minor inflation. A government report on Friday showed US personal spending rose for the month of April in line with forecasts. Data also revealed that inflation in the Euro zone rose to a historic peak of 3.6 percent in May. German retail sales also fell in April fell for the second month in a row.
The dollar has had two good months of gains versus the euro. It’s gain slowed at bit on Friday as there was some selling off. This may be due to some investors wanting to sell to cash in on gains after a good run for the US currency. The dollar attracted broad support this week from a further retreat in oil prices from last week’s record of $135 per barrel. The personal income and spending report fits well with recent data reflecting a bottom has been reached for the dollar. Many feel that the focus for the greenback is now on oil prices. Overall, this seems to be good news for the dollar. Based on the data, it shows definite signs of a stabilizing economy.
In an interview published on Friday, European Central Bank President Jean-Claude Trichet said that the central bank will do everything it can to preserve price stability and reinforce expectations of low inflation. Whether or not this can be accomplished remains to be seen as the euro is no different than any other currency. It too must overcome slowing growth and rising inflation. The euro/dollar currency pair may settle into a range bound movement as the market is still not certain about the interest rate trend in Europe.
Some feel that higher inflation in the euro zone may lead to a more hawkish monetary policy stance, while others feel that a possible emerging weakness of the economy in the zone may require a rate cut. Inflation may well be likely to remain above the ECB’s target in the near term, but against the backdrop of slowing growth, the ECB may also be unlikely to increase interest rates for the rest of the year.
Against the Japanese yen, the dollar was nearly flat for the day at around 105 yen, but still within sight of a three-month high of 105.87 hit on Thursday. The dollar has strengthened versus the yen on the back of weak economic data out of Japan including a larger than expected rise in unemployment and a drop in industrial production. The US dollar went slightly lower against other major currencies after touching near three-month highs against the Japanese currency overnight. The dollar strengthened in New York trading overnight following data that the US economy grew faster than previously estimated in the first quarter. The GDP data helped ease concerns about the US economy while boosting expectations that the Federal Reserve may raise interest rates this year.
There are now expectations that the Fed has finished with its rate cutting cycle and will most likely start raising rates from abnormally low levels as the US economy starts to benefit from the previous fiscal and monetary measures. Even among fears of inflation, this echos Dallas Federal Reserve President Richard Fisher’s comments that he would expect a change in course for the Fed if inflationary expectations continue to worsen, even in the face of an anaemic economic scenario. These comments helped to boost the dollar.
Rate hikes would be a large change in the Fed’s recent monetary policy stance. Growing sentiment of this expectation seemed to strengthen after the Commerce Department said the US economy grew 0.9 percent in the first quarter based on revised data. This was higher than the government’s previous estimate of 0.6 percent growth, helping to ease worries about a recession. The closely eyed ISM survey on the US manufacturing and service sector is scheduled for release next week. Concerns over inflation are also affecting US Treasury prices, forcing the long end of the yield curve higher and lending support to the dollar. The yield of the 10 year Treasury note, which moves in the opposite direction to its price, rose to 4.08 percent in late trading from 4.01 percent Wednesday.
The more optimistic outlook for Fed expectations may also be helping to fuel a growing view that the euro zone economy may suffer concomitantly with the US economic fallout and beginnings of rebound. And if oil prices continue to ease, the recent euro/dollar currency pair rate move trend could gain momentum.
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