The US Dollar traded in volatile ranges overnight against most major currencies as investors weigh expectations of future monetary policy in the US and other G10 nations. Fed Chairman Bernanke is testifying before congress this morning in regards to the central bank's current ultra-accommodative policies, and it appears that low rates and asset purchases will continue in the near term. Bernanke did cite his attention to rising prices consumers are paying at the pump and the grocery store, but he is not concerned that overall headline inflation will force the Fed to hike rates in the near term. This comes as a contrast to the bias of policymakers in the UK and Eurozone as above-benchmark inflation has investors beginning to price in higher rates. The USD has however, held much of its ground as higher rates in other G10 nations may hamper future economic growth, which would ultimately benefit the dollar as the US economy continues to expand at a slow and steady pace. Data this morning showed construction spending dropped by 0.7%, which is worse than the expected -0.4% reading, but better than last month's 2.5% drop. ISM manufacturing registered largely in line with expectations at 61.4, up from 60.8 last month. Vehicle sales also showed steady growth despite swiftly rising gasoline prices. However, investors remain largely focused on this Friday's nonfarm payrolls and unemployment reports.
The EUR is relatively flat this morning despite rather dovish commentary from US Fed Chairman, Ben Bernanke. While most investors have begun pricing in higher interest rates in the Eurozone as rising prices has the inflation hawks calling for tighter policy, markets remain apprehensive with European debt still in question. With Ireland and Greece having already accepted massive bailout loans from the EUR-IMF, and with Portugal expected to soon follow, investors are most worried about which country might be next. Spain is often the first on most speculators' lists as the last of the PIGS, and with serious economic imbalances, but the political situation in Belgium is worrying bond investors this morning. Belgium's government, or lack thereof, has been deadlocked for nearly a year now with no full-time lawmakers to work on reducing the nation's debt. Belgian debt is forecast to top 101% of GDP in 2011, while Spain and Portugal's debt is expected to reach 70% and 89% of GDP respectively. While a bailout is far from imminent, it's this type of uncertainty over the Eurozone economies that will continue to provide significant resistance for the common currency in the near and long term.
Sterling jumped to a 13-month high against the USD this morning on strong economic data out of the UK. British house prices unexpectedly rose 0.3% last month, compared with the 0.2% contraction forecasted. A measure of UK manufacturing also matched an all-time high of 61.5 last month. The stronger than expected data is supporting the argument for the BoE to hike interest rates as soon as this month to combat ballooning inflation. Money markets are currently signaling that policymakers will raise the key rate by about 68 basis points by the end of the year, but many investors remain worried that higher borrowing costs will weigh on an already fragile British economy.
Commodity currencies remain towards the top of their ranges this morning, but are off their recent highs. The move lower came after the RBA declined to raise interest rates, citing the rise in consumer prices as not enough to warrant an immediate increase. Likewise, the BoC left rates on hold and cited the challenges that a strong currency pose for the nation's exporters. The loonie dropped for the first time in five days after the Bank said it will consider future rate hikes in a recovery that is only slightly faster than it expected. However, with oil pushing back over $98.50 in early trading, and with gold and agricultural commodities moving higher as well, the AUD, NZD, CAD and ZAR will likely remain relatively well supported, albeit within their recent ranges.
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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.