The US dollar continued its downward trend against most major currencies after data showed rising gas prices and meager consumer sentiment figures. Consumer's view of the US economy fell 2.4%, after average gasoline prices rose above $3.00 a gallon. The Michigan sentiment index reported consumer sentiment fell to 72.2 from 74.5 in December and a survey of current economic conditions dropped to 79.8 from 85.3 in the prior month.
Despite the negative effect of higher gasoline prices, the survey reported consumer expectations rose to 68.2 from 67.5 in December, while the 12-month economic outlook index rose to 87, which was its highest since 2009. Additionally, the Commerce Department reported retail sales climbed 0.6% in December and 6.6% over the entire year, the largest 12-month gain since 1999.
The euro rallied further against the USD after comments from European Central Bank chief Jean-Claude Trichet raised expectations of an interest rate hike. The euro bank-to-bank lending rate jumped and the euro hit a one-month high of $1.3458 EUR/USD after Trichet warned about inflation in a recent interview. However, many analysts say that the euro may gain resistance above $1.35 levels given the nervousness over the large amount of debt supply from weaker Eurozone economies this year.
The British pound gained further against the USD supported by anticipation that UK interest rates may also rise in the coming months. The Bank of England kept rates unchanged yesterday, but rising inflation has led to speculation that rates may rise as soon as May of this year. The Office for National Statistics reported output prices rose 4.2% in December, surpassing expectations of a 3.9% rise. Bolstered prices were due to rising oil and food prices which increased pressure on the BOE to contain consumer price inflation, which is forecasted to rise towards 4% in the coming months
The Japanese yen traded slightly higher against the USD after a dip in US consumer sentiment. Domestically, Japanese wholesale prices reported the third straight month of price increase, which was 1.2% in December, higher than the median forecast of a 1.0% rise. Analysts say the rise is unlikely to lift Japan out of their current deflation as the weak domestic demand makes it difficult for companies to pass increased material costs onto consumers.
The Canadian dollar initially weakened against the US dollar, but managed to recover some ground as oil held in at $90 a barrel. Analysts will look towards Bank of Canada's interest rate decision next Tuesday. Focus on the tone of central bank chief, Mark Carney will be closely watched for further direction in the USD/CAD currency pair.
The Australian and New Zealand dollars fell against the USD after China's central bank raised lenders' reserve requirements for the fourth time in two months. As China's inflation is expected to stay elevated in the coming months, local bank reserve requirements rose by 50 basis points which brought fears of a slowdown in the Chinese economy. The Aussie is sensitive to China's growth expectations as trade links remain strong between the two countries.
Indications of Overnight rates:
10-Year Treasury Note Yield: 3.317%
Dow Jones Industrial Average: 11,765.47 + 0.29%
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.