The US dollar fell against 15 of 16 most actively traded partners this morning on divergent economic data. Weekly jobless claims disappointed, pushing back above the 400K mark to register 410K. Continuing claims also gained for the first time in more than a month, highlighting the continued weakness in the labor market. However, manufacturing in the Philadelphia region showed surprising signs of life with the Philly Fed blowing out expectations with a reading of 35.9. Economists forecast a gain to 21 from 19.3 last month, but demand for new equipment and increased exports helped push the measure to the highest level in more than seven years. Consumer prices also showed quickening growth in January, gaining 0.4% from the previous month. The larger-than-expected gain brings the annualized inflation rate to 1.6%, and 1.0% when food and energy are stripped out. Rising inflation could prove supportive for the dollar in the longer term as expectations grow that the Fed will begin to consider normalizing rates. However, with the Fed's QE2 program still in effect through June, and with tighter policy still far from imminent, higher prices could weigh on consumer spending. Investors will however pay close attention to Fed Chairman Bernanke's testimony on Capitol Hill this morning, and any statements regarding future policy.
The JPY and CHF gained the most against the dollar overnight on reports that Iranian warships were poised to pass through the Suez Canal on their way to Syria. With continued unrest in the Middle East, the US's primary ally in the region, Israel, saw Iran's decision as a provocation with the regional balance of power in flux. Demonstrations also turned deadly overnight in Bahrain, the Middle Eastern base for a number of major international corporations, as military police drove protestors from a public square. With the geopolitical unrest showing signs of contagion, oil prices have jumped and investors have sought the safety of currencies like the yen and swiss franc as investors fear protests could impede oil production and global trade.
The EUR has extended yesterday's gains, albeit within its recent ranges against most major currencies. Euro-bulls were encouraged by better-than-expected Eurozone consumer confidence with the gauge gaining to -9.9, up from -11.2 in January, and besting the expected gain to -11.0. While the measure does remain negative, it appears that the economy is gathering strength and European officials are close to reaching consensus on the expansion of a permanent Eurozone bailout fund. The common currency also pushed higher as its positive correlation with crude oil prices remains largely intact. However, gains have been capped by uncertainty over the Middle East with investors opting for less risky trades this morning.
The GBP gained this morning on hawkish BoE commentary. Policymaker, Andrew Sentence, told reporters this morning that monetary policy would most likely need to be tightened faster, and by more than the markets currently expect to stave off inflation. He went onto say that the country's currency is the first line of defense for the U.K. against global inflationary pressures. However, this is not the first time Mr. Sentence has advocated for higher rates, and markets have taken his comments in stride with the GBP locked within its recent ranges.
Commodity currencies gained overnight on rising metals, energy and food prices. Oil has jumped to a two-week high on renewed fears over unrest in the Middle East. Gold has also continued to grind higher, edging ever closer to its highs above the $1400 level seen late last year. And food prices have begun to hit consumer wallets with the shelf prices on bacon to coffee jumping by an average of 10%. The CAD reached its strongest level since March 2008 on higher oil prices as Iranian warships were rumored to be passing through the Suez Canal. The loonie also outperformed other commodity-linked currencies like the MXN and NOK, as a report showed that wholesale sales increased for a fifth straight month in the US, Canada's primary trading partner. The AUD pushed back above parity with the USD for the first time in a week on hawkish comments from RBA policymaker, Philip Lowe. He told reporters that global commodity prices will likely remain elevated for an extended period and tighter monetary policy in the region may be needed. However, gains in higher-yielding currencies are being tempered by reduced demand for riskier assets this morning as the situation worsens in the Middle East.
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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.