The US dollar is mixed this morning, falling against half of its 16 most actively traded counterparts on lackluster economic data. US retail sales registered a 0.3% gain, down from 0.6% last month, and short of the 0.5% expected. The rise was the smallest since the measure turned positive last June as harsh winter weather likely kept shoppers at home. Eight of thirteen major categories gained last month, with the index led by rising prices at service stations and grocery stores. A separate report did however show that manufacturing in New York sped up last month, with Empire Manufacturing registering 15.43, the highest reading in nine months. The price of imports also increased, with the rise led by higher food and fuel prices. For the US economy to make meaningful continued progress, the slowly improving numbers in the labor market must translate into steady growth in consumption. Until there are positive signs that the economy has in fact turned the corner from recovery to expansion, the dollar will struggle to gain on its own legs. However, with markets focused on global growth prospects for the world's major economies, and digesting the Obama administration's 2012 proposed budget, the greenback will likely remain within its recent ranges against most currencies in the near term.
The euro has given up early gains against the USD after European officials laid out the groundwork for an expansion of the EFSF. Euro Zone officials discussed the basis for a comprehensive package to be finalized in late March, that many hope will help resolve the year-long European debt crisis. However, while the framework is a strong first step, investors remain skeptical that Germany will approve any such expansion without commitments made for closer economic coordination within the Eurozone - currently a deal-breaker for the region's periphery economies. Eurozone GDP fell short of forecasts this morning, registering a gain of 0.3%, versus an expected 0.4%. However, a separate report showed that German investor confidence gained for a fourth month in a row as stocks in Europe's largest economy gained to a three-year high. Despite their own banking woes (one of the country's largest lenders, West LB, appears to be on the brink of failure), strong demand in fast-growing developing economies boosted German exports and helped push unemployment to a two-decade low, further underscoring the disparity between the Euro Zone's core and periphery economies. Germany's continued strong performance will however provide downside support for the common currency in both the near and long term, but the inability of EU officials to come to an agreement on the regional bailout fund will likely cap any significant gains.
Sterling gained to a fresh monthly-high versus the euro, and the strongest against the USD in more than two weeks as a report showed UK inflation gained in January. CPI data jumped to 4.0%, up from 3.7% in December, as prices rose at the fastest pace in more than two years. The GBP gained against all 16 of its most actively traded counterparts after the report, as expectations grow that the BoE will be forced to raise interest rates to tame inflation. Price growth has now exceeded the Bank's two percent target for 14 consecutive months, but the outspokenly dovish BoE Governor, Mervyn King, worries that tighter policy could hurt the economy. In the near term, rising inflation will support the pound as investors increase bets that the BoE will tighten sooner rather than later, however, tough austerity measures from the coalition British government will likely relegate the pound to ranges.
The JPY fell to a fresh 2011-low this morning against a number of currencies including the USD, EUR and AUD as reports showed continued growth in the US economy, albeit slower than expected. The spread between the yield on a two-year US Note and similar-maturity Japanese debt climbed to within one basis point of the largest gap in seven months, causing the yen to slide. As global investor sentiment gains, the yen will likely begin to ease back towards the lower end of its wide ranges seen in the last two years.
Commodity currencies are lower this morning across the board, despite recovering prices after last week's knee-jerk selloff when Egyptian President Mubarak stepped down. Nascent economic growth in the Eurozone, and weak retail sales in the US have led investors to sell the AUD and CAD as global demand appear to be at risk. Moreover, the Aussie continues to struggle below parity with the USD as expectations grow that interest rates will continue to rise in China, the destination for the majority of Australia's exports. Conversely, minutes from the RBA's Feb 1st meeting show that consumer restraint has slowed inflation and is offsetting stronger demand for the nation's resources. The reduced expectations for tighter policy are weighing on the AUD's allure as a high-yielding asset. The CAD also fell after US retail sales, the largest source of demand for Canadian exports, fell short of expectations, suggesting the higher export prices and a stronger CAD may weigh on the Canadian economy going forward.
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This market summary is prepared by Union Bank's Global FX Department for the general information of its customers. It is based on the most accurate information currently available, but should not be considered investment advice or a guarantee of future exchange rates or trends.