The US dollar tumbled further after a slower rise in U.S. inflation during May, which suggested that U.S. interest rates will remain low for now. Consumer prices had the biggest annual drop since 1950. Recently, the markets had started to price in rate hikes by year end, but it is still premature according to some analysts. Yesterday, U.S. housing starts came out strong, but the market still needs more evidence of solid growth for risk appetite to continue. Poor industrial production, which fell for the seventh straight month in May, indicated that part of the U.S. economy is still very sluggish.
Yesterday, the US dollar was hammered after leaders of the BRIC nations ( Brazil , Russia , India , China ) said the world needed a “more diversified” global monetary system. The comments sparked concerns that the US dollar may lose its status as the main global reserve currency. Talk that the BRIC nations may shift some foreign reserves into International Monetary Fund bonds also pressured the US dollar lower. Despite a falling US dollar, the greenback is expected to remain a safe haven currency until the global economy rebounds. Any poor data elsewhere in the world would be dollar supportive as well.
The euro remains supported by a weaker US dollar. Yesterday, the euro benefited from upbeat German think tank ZEW economic sentiment index, which rose to 44.8 in June, the highest level since May 2006. The news added optimism that the euro zone will recover later this year.
The sterling gave back gains after Bank of England's (BOE) June 4 meeting revealed that policy makers unanimously voted to continue its asset-purchasing program. Yesterday, the market thought a smaller-than-expected fall in UK inflation would reduce the BOE's need for further quantitative easing. Policy makers are not convinced of an economic recovery in the UK despite recent encouraging data. Medium term outlook for growth and inflation has not changed since their May forecasts. Meanwhile, UK labor market came out better than expected, but the market shrugged off the news and used it as an excuse to take profits after the sterling surged to another 2009 high yesterday. Expect the sterling to remain strong as its economy is expected to recover from the recession before the euro zone.
The Japanese yen had further gains, boosted by a weaker US dollar. Yen gains were also driven by recent news that Bank of Japan raised its outlook on Japan 's economy for a second month.
The Canadian dollar is weaker, hurt by falling global stocks, crude oil and gold prices. Oil prices are back below $70 a barrel. Concerns that the global economy is going through a bit of a correction after stabilizing recently pushed the loonie lower. Thus, as investors shy away from risk, commodity-linked currencies such as the Canadian , Australian and New Zealand dollars will be affected. However, demand for higher-yielding currencies remain, thus losses were limited.
Meanwhile, further declines in metal prices continue to pressure the Australian dollar lower. Australia is the world's leading exporter of commodities such as iron ore and copper. Thus lower metal prices are bad news for the local dollar.
The New Zealand dollar also trimmed gains after its central bank Governor Alan Bollard said recent gains were preventing its economy from recovering from its longest recession in over three decades. New Zealand 's exports had been stuck in a recession for the last five years, hurt by rising costs and a higher exchange rates.
10-Year Treasury Note Yield : 3.6240%
Dow Jones Industrial Average : 8,489.25 -15.42