Euro rose to a one-week high at 1.4328 against the greenback on Thursday as the eurozone’s two biggest economies unexpectedly returned to growth in the second quarter of the year. In Germany, Europe’s largest economy, gross domestic product rose surprisingly by 0.3% in the second quarter, bringing an end to the country’s deepest recession and boosting hopes of a recovery in the broader eurozone. French GDP also grew by 0.3% in the second quarter. However, a separate report showed that the eurozone’s economy contracted 0.1% in Q2 but less than economists' consensus forecast of a 0.5% contraction. However, investors partially reversed their enthusiasm of recovery and risk seeking after the U.S. posted a much worse-than-expected retail sales figure and the pair retreated partly due to profit-taking.
Earlier in the day, the dollar rose to 96.50 against the Japanese yen as upbeat European data sparked investors to seek higher-yielding assets. The greenback tumbled to as low as 95.04 after the release of the weak U.S. retail sales data combined with the higher-than-expected weekly jobless claims. The U.S. Commerce Department said total retail sales edged down 0.1% in July after increasing 0.8% in June. Analyst expected a boost to retail sales from the government’s 'Car Allowance Rebate System' and predicted 0.7% rise in overall July sales. The Labour Department showed first-time applications for state unemployment insurance benefits rose to 558,000 last week from 554,000 in the previous week.
The British pound strengthened against the dollar to as high as 1.6670 from a two-week low of 1.6391 hit on Wednesday after the U.K. jobless rate hit a 3-year high and the Bank of England’s Inflation report signaled that monetary policy is unlikely to be tightened any time soon. The rise was mainly driven by the reports showing the German and French economies unexpectedly grew, boosting optimism the worst of the recession is over in Europe. In addition, Prudential Plc, the U.K.’s biggest insurer by market value, reported higher-than-expected operating profit and increased its dividend. Cable retreated to around 1.6550/55 in New York afternoon.
The dollar was further pressured by growing demand for riskier assets including commodities and higher-yielding currencies after the Fed on Wednesday stated clearly that the U.S. economy was leveling out. Aud/usd rose from 0.8330 to 0.8454, nzd/usd advanced from 0.6706 to 0.6815.
Data to be released on Friday include Japan BoJ meeting minutes, eurozone HICP, U.S. CPI, capacity utilisation, industrial production and the University of Michigan confidence survey.