Currency Market Analysis

May 20, 2015 | Currency Market Analysis

Global Themes

The U.S. dollar continued to push higher, notching threeweek peaks against the euro and its strongest in two months against the yen. America’s currency has rebounded from recent multimonth lows as the market spotlight has shined anew on policy divergence between the U.S. and euro zone central banks and the U.S. economy has flashed renewed signs of life. The dollar has also benefited from growing risks that Greece could be headed for an imminent default on its massive debts if Athens doesn’t soon reach a deal to receive more rescue cash. A senior ECB official this week said the central bank may buy more bonds to boost growth over the coming weeks which would bloat its balance sheet and weigh on the euro. The remarks were seemingly designed to put a lid on both area bond yields, which had been on a tear, and the euro which had outperformed the dollar by about 8% over the past month for its best stretch of gains in four years. Meanwhile, stronger than expected U.S. housing data this week added to the case the Fed to boost interest rates for the first time in nearly 10 years. The dollar today should take a cue from Fed minutes which come due at 2 p.m. EDT and may shed critical light on the outlook for higher U.S. interest rates.


A hawkish tinge to the latest Bank of England minutes helped sterling catch a modest bounce against the otherwise stronger greenback. All nine officials voted to keep U.K. rates parked at record lows of 0.50%. But some officials saw potential scope for interest rates to eventually rise with unemployment running at 2008 lows of 5.5%. Still, any U.K. rate hike seems a long way off after data this week showed inflation dipped below zero to new record lows and levels last touched more than a quarter century ago. The next fundamental driver for the pound arrives with retail sales Thursday which are forecast to return to the growth column in April.


The loonie firmed above its weakest level in nearly a month as Canadian data was largely in line with expectations and the greenback succumbed to a bout of profit-taking ahead of Fed minutes later today. Wholesale trade north of the border rose 0.8% in March, boding decently for first quarter growth. The next major event on the loonie’s radar is an approaching Bank of Canada announcement on May 27.


Caution ahead of the release of important minutes from the last Fed meeting caused the dollar to pare gains that earlier took it to three-week peaks against the euro and to two-month highs against the yen. At its last meeting in late April, the Fed tempered its outlook for the U.S. economy and was mum on when it might lift interest rates. Dollar bulls want to read minutes that keep the door open to a sooner rather than later rate hike. Bears, on the other hand, want the minutes to officially quash expectations of a midyear move. The Fed next meets on June 16-17 and officials will have one last nonfarm payrolls report to view beforehand.


The world’s No. 3 economy grew at an annualized rate of 2.4% in the first quarter, the fastest in a year and the second quarter in a row of expansion. Nevertheless, the encouraging data wasn’t enough to overshadow a steady uptick in U.S. Treasury yields which did more to support the greenback.


The euro bled more buoyancy and at one point earlier fell below $1.11 to levels last reached three weeks ago. The euro has suffered gut punches this week in dovish intimations from senior members of the ECB, one of which stood ready to deploy stronger stimulus if necessary, and risks seen as mounting toward a possible Greek default on its obligations. The dovish rhetoric from the 19-country central bank was seemingly designed to reverse some of the recent rise in area bond yields, which make borrowing more expense, a negative for the recovery, and the euro whose recently renewed vigor is bad for the export-driven economy. Although European officials seem amenable to a weaker currency, they would also need the cooperation of better news on the U.S. economy to really force the euro lower which would help strengthen the case for the Fed to boost interest rates.

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