Here is the weekly FOREX wrap-up for the week ending on June 13, 2008. The United States greenback had its best week in 3 years rallying all five days of the week as market expectations regarding US interest rates changed dramatically. The dollar continued its strong run this week after US inflation figures were seen to have risen sharply, fueling further expectations of a rate hike in the world’s largest economy. Fed Chairman Bernanke made some extremely hawkish remarks last week. He has spent the last 18 months fighting the negative economic effects of the subprime housing crisis and credit crunch by lowering rates from 5.25% to 2.00%. Apparently the Fed now feels that inflation is a bigger problem than growth for the US economy and plans on raising rates.
Inflation is of course being driven by oil prices and the Fed has suggested that US monetary policy will become restrictive in order to restrain the rising prices of the commodity. This weeks G8 Summit also addressed the issue with member nations providing a strongly worded document asking oil producers to increase output. In response, Saudi Arabia, a key swing OPEC state, indicated it has agreed to pump out an extra 500,000 barrels of oil per day. If this manages to push oil prices below $130 per barrel, the greenback should strengthen even further, perhaps even at the start of trading next week.
This coming week, the US economic calendar contains only 2nd tier economic data, so the factors that drove trade last week will probably continue to play an important part this week. Obviously all eyes will be focused on oil prices and the US dollars response. The greenback has had a powerful shift of late, and unless US data produces major negative surprises in the less important industrila data due this week, it appears the EUR/USD combo will move towards the dollar gaining more ground on the euro.
The dollar’s gains were also aided by some of the euro’s problems. In spite of an impressive week of economic data, the euro lost ground again. This was exacerbated by the fact that Ireland rejected the Lisbon Treaty required to ratify the EU Constitution. Other states have rejected the proposed EU Constitution Treaty in the past, but it still does not put the European Monetary Union at risk. The Euro did lose ground, but most have realized that the single EU currency is here to stay because the EU can still function under its existing member agreements. However, the political break that is developing in the EZ between Northern and Southern member state economies is creating doubt about a possible ECB rate hike next month.
And like US the economic calendar for this coming week, the EZ calendar is virtually void of any meaningful data. More euro selling could occur as FOREX traders may start to discount President Trichtetâ€™s hawkish talk from two weeks ago.
On another note, the British pound dropped sharply over the course of the week as mixed UK economic data could not stave off the drop and help the currency fight a significant rally by the US dollar. It seems to be proving out that downside risks for the UK economy are high, and with price pressures building rapidly, the Bank of England has little to no room to cut rates.
In the USD/JPY currency pair, the bullish sentiment for the dollar along with a slowing Japanese economy helped the dollar to gain slightly on the yen. There was diminishing sentiment for Japanese economic merchants for a second straight month as rising inflation continues to lower consumerâ€™s purchasing power. The Japanese economy is already seeing a slowdown from declining US demand and may not be able to depend on domestic spending to pump up the economy. Growth was slowing due to rising fuel and raw material costs.
The Swiss franc had a relatively quiet economic calendar last week, but the currency was nonetheless brought to the edge of a technical cliff as a strong US dollar countered fading risk sentiment for USDCHF. The New Zealand Dollar fell sharply for the second consecutive week of trading, as bearish momentum against it built and worsening interest rate differentials brought it to five-month lows against the US dollar. And finally the Autralian dollar shed recent gains as the domestic economy finally took toll on the currency. Juneâ€™s Westpac Consumer Confidence contracted sharply to -5.7% versus Mayâ€™s 2.7% number. This was the lowest level in nearly 16 years as consumers wavered in the face of rising food and energy prices. The RBA has also effectively ruled out monetary easing. They have decided to stay hawkish for now as inflation is expected to exceed the target 3% level. Mayâ€™s employment data which came out Thursday was also no help. Economists were expecting the economy to add 13,500 jobs, but were sorely disappointed as Australia lost 19,700 jobs instead. This ended a record 18 months of steady job growth and was the biggest monthly decline since September of 2005.
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