The end of July has traders on edge after a month of remarkable weakness for the dollar, while they cautiously await August PMI data due next week for the latest health check on the state of economic health. Comments from St. Louis Fed President James Bullard sounded the deflationary bell once more causing a further flow of refugees into the Japanese yen, which raced to its highest level for 2010 at ¥86.16. The yen rose against the euro, which also looks set to close the month with a substantial eight cent gain against the dollar.

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Japanese yen -The yen strengthened overnight and after reaching its highest against the dollar so far this year it currently stands at ¥86.40 while one euro buys ¥112.42. The immediate driving factor creating yen strength was the deflation discussion ushered in by Mr. Bullard who in a paper released on Thursday argued that the Fed should pre-announce its plans in the event of another round of economic shocks. At the end of a week in which investors have preferred strengthening company earnings, the specter of a further deterioration in the backdrop caused demand for the yen.

In addition there was plenty of fresh data out of Tokyo overnight. Industrial production slumped by 1.5% in June while the jobless rate edged up to 5.3% where it hasn't been since November. Despite this data along with a 0.7% decline in core CPI for July, household spending unexpectedly rose by 0.5% year-on-year despite expectations of a decline. Construction orders contracted 10.2% over the year.

U.S. Dollar - Despite the marginal miss on GDP, which came in at a slower 2.4% between April and June on an annualized seasonally adjusted basis, the dollar is holding up relatively well. Mr. Bullard's foray into a deflationary world while rationale appears to be more of a contingency business plan than a dire prediction for later in the year.

Euro - The euro closed at $1.2237 against the dollar at the end of June and thanks to a combination of growth and relief over the health of the banking system it could well hang on to gains above $1.3000 to round out the month of July. A bout of earlier dollar strength this morning saw traders take profits driving the euro to an intraday low of $1.2986 ahead of a U.S. second quarter GDP report. Before the report the single European unit recovered to buy $1.3030. Data released today showed no change in the rate of unemployment across the Eurozone, which stood at 10% during June. Data for consumer price inflation across the Eurozone for July showed a pick up in the rate by three-tenths to 1.7%.

Aussie dollar - With China leading the pack as it releases its PMI data on Sunday investors let go of the accelerator pedal driving recent gains in the Aussie unit, which today eased to 89.95 U.S. cents. The Aussie has gained 7.2% throughout July against the greenback. Market rumor says the China PMI data might have fallen sharply when August data is released with some predicting a dip for manufacturing beneath the 50-line meaning contraction for the first time in 18 months.

Canadian dollar - The Canadian dollar was riding high ahead of U.S. GDP and a monthly GDP report of its own. In the event the May growth rate of 0.1% following a flat reading for April still fell short of a predicted pace of 0.2% growth. The Canadian dollar ceded ground on disappointment probably more so on U.S. grounds rather than domestically. The loonie stands at an unchanged 96.49 U.S. cents having reached 96.95 right in front of the data.

British pound - The pound rebounded from early New York lows that saw it slide to $1.5500 and its weakest reading this week gaining a cent in the wake of the U.S. report.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com       

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