Wednesday July 27, 2011

The dollar's fight back campaign against selling by investors wary of a debt downgrade for the U.S. should lawmakers fail to agree on raising the $14.3 trillion debt ceiling ran into difficulties after a durable goods report disappointed. Several units ran up to multi-year peaks or record highs against an ailing greenback before yet unresolved European issues unsettled the single currency. Monetary policy expectations in Australia also reversed course following a jump in consumer prices leading some to believe that the next move from the central bank will, after all, be upwards.

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U.S. Dollar - The Obama administration has threatened to veto a Republican proposal to raise the nation's debt ceiling while irritation with House Speaker Boehner's attempts to slash spending among his own party is complicating the path to an August 2 deadline. Failure to compromise would cause a debt default while ratings agency Standard & Poor's described the likelihood of a U.S. debt downgrade over the coming three months as nothing more than a coin toss. The dollar index rose from a near three-month low earlier but stalled after a report showed surprising weakness in orders for goods meant to last for more than three years. Durable goods orders had been expected to rise modestly following a 1.9% rise in May. In the event the report revealed a 2.1% plunge in orders dashing hopes for an economic recovery and driving down stock index futures. The dollar index remains higher on the day at 73.71.

Euro - The euro reached its highest since Independence Day still glowing from a recent accord between EU nations to provide Greece with a newly-fashioned bailout package. The summit also expanded the role of the region's €440 billion bailout fund. However, a letter from German Finance Minister Wolfgang Schaeuble briefing lawmaker on the finer details of last week's EU summit confirmed earlier views expressed by Chancellor Merkel who opposed extensive use of the emergency fund to buy bonds in the secondary market for government debt. Mr. Schaeuble said that there should be no "blank check" and said that the ECB would need to justify bond purchases of ailing governments only when financial stability is threatened. The euro was sold on the news of the letter and reached a session low at $1.4439. Earlier it traded to as high as $1.4536 and its strongest since July 5.

Aussie dollar - The Aussie reached a record high following the release of quarterly data showing a further gain in inflation. With still-lingering food price gains dashing hopes for a downturn in cost-pressures resulting from flooding and cyclone activity earlier in the year, second-quarter costs rose by 0.9% lifting the annual pace of increase to its highest in three years at the rate of 3.6%. In the first quarter prices rose year-over-year at a rate of 3.3%. The report dashed expectations for an interest rate decrease while Australian Treasurer Wayne Swan blamed still rising food prices on a crimp in agricultural output caused by crop devastation earlier in the year. Only if Mr. Swan's predictions play out with farmers returning greater local harvests soon, will inflation stand a chance of falling back to the Reserve Bank's price target range spanning 2-3%. The Aussie unit reached $1.1079 U.S. cents at peak of the buying frenzy as expectations for a monetary reduction were unwound.

Canadian dollar - The weaker-than-forecast U.S. durable goods report sapped the strength from a rally for the local dollar, which has been gaining on account of the debt impasse south of the border. The Canadian dollar had closed in on a three-year high lately spurred by a rally for commodity prices - minerals and metals in which the local economy benefits from as it finds no shortage in global demand. At its highest point of the day the local dollar rose to buy $1.0589 U.S. cents.

Japanese yen - Weakness in the U.S. dollar index has ensured strength in the value of the yen as a safe haven unit as the deficit-ceiling impasse drags on. Bank of Japan official Hidetoshi Kamezaki expressed concern over the rising yen overnight noting its detrimental impact on the domestic economy. Mr. Kamekazi said that the central bank may yet intervene alone in the currency market as it proactively responds to growing threats from the yen. The Bank last intervened in isolation in September but did so in conjunction with the international community in March following the Fukushima disaster in March. The yen currently buys ¥77.84.

British pound - The pound slumped from its strongest value against the dollar in two months after a CBI report showed a far-deeper slide in business optimism than was expected. During July optimism among business executives fell from a reading of positive nine to negative 16. Total orders fell to negative 10, while the balance of retailers expecting to raise prices in the difficult business environment fell to plus four after plus 27 in the previous monthly CBI trends report. The pound earlier reached $1.6435 only to slip to $1.6355 later in the session.

Andrew Wilkinson

Senior Market Analyst       

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