The US dollar has been on a virtual see-saw this morning; following the news out of Europe that the BoE and the ECB have left interest rates unchanged. Though the news was as expected, European Central Bank President Jean-Claude Trichet reiterated that it was important that US Authorities express support for a strong dollar, and the USD was able to gain on this comment.
The dollar has recovered from earlier falls against the euro and other higher risk currencies, with the market wary ahead of key U.S. non-farm payrolls data Friday, which have the potential to dampen hopes the global economy is on the mend.
U.S. Federal Reserve Chairman Ben Bernanke said yesterday that while he expected the U.S. recession to end this year, getting government debt under control was vital to ensuring the country's long-term economic health.
The euro fell against the dollar in volatile trading as Trichet did little to change expectations for interest rates in the euro zone. With no hint that another 25 basis-point cut in the second half is likely, Trichet admitted they'll have negative growth this year but says it will recover in 2010.
The euro zone economy is likely to shrink at a much slower pace for the rest of the year, Trichet said, citing economic survey data. Speaking after the ECB kept interest rates on hold, Trichet said the surveys suggested growth was likely to resume by the middle of next year. However, he expected a further deterioration in labor markets in the coming months.
The Bank of England also decided to keep UK rates on hold. Sterling fell against the dollar, erasing earlier gains as investors reassessed the economic outlook and as concerns mounted over Britain 's political situation.
Focus has shifted to politics as the pound tumbled sharply on speculation British Prime Minister Gordon Brown would resign, which was quickly dismissed by his office. Speculation in financial markets that Brown is resigning is absolute nonsense, his office said.
Traders are keeping an eye out on the increasingly tenuous UK political situation. A cabinet reshuffle is widely expected after European Parliament and local elections on Thursday.
The Japanese yen is slightly weaker this morning against the dollar. Japanese companies slashed spending on equipment as demand for cars and consumer electronics has plunged worldwide since late last year. Evidence is mounting that the worst of the recession may be over, with Japanese companies having sold off inventories and starting to restock, leading to a rebound in industrial output.
Against that backdrop, analysts expect the world's second-largest economy to grow 0.5% from the April-June quarter onwards.
Still, falling wages and a rising jobless rate will weigh on growth in the coming months.
The Canadian dollar is lower against the greenback this morning, as the Bank of Canada left rates stable as expected. The BoC said it plans to leave interest rates low until next year and had unusually strong comments on the threat posed by the sharp appreciation of the Canadian dollar.
It noted recent significant improvements in financial conditions and commodity prices and a modest recovery in consumer and business confidence. But the bank said all of that could be lost if the Canadian dollar, which rose 9.3% against the U.S. dollar in May, sustains current levels.
The Australian dollar pulled back slightly from recent 8-month highs. The Aussie's strength, which has zoomed up 30% since the start of March, was starting to concern exporters.
Today's surprise trade deficit number for April is having a dampening effect on the currency. Reserve Bank of Australia Governor Glenn Stevens reiterated an easing monetary policy bias, highlighting waning consumer spending and falling business spending as key risks to the economy in the short term, though he added that Australia was well placed for economic expansion towards the end of this year.
The New Zealand dollar gave up some recent gains, falling sharply lower as investors had second thoughts about the strength and speed of any global recovery.
The kiwi, like the Aussie, is seen as highly geared to global economic recovery and is riding a wave of market optimism. Improved risk appetite as optimism grows that the worst of the global recession may be over.
Also lower today is the Mexican peso, as concerns about the slumping economy weighed on sentiment. The peso has been hammered since last year because of falling U.S. demand for the country's exports, which has thrown the economy into a deep recession.
Traders see the peso trading in a range between 13.00 and 13.30 per dollar in the short term.