Dollar slides despite buoyant data
Dollar slides despite buoyant data
By Steve Johnson
Published: April 28 2006 11:23 | Last updated: April 28 2006 17:41. Copyright by The Financial Times
The US dollar suffered a second week of sharp losses, despite the release of a tranche of broadly upbeat data releases, adding weight to the view that regime change is afoot in the currency market.
Yield differentials have been the prime driver of currencies since the start of 2005. Thus with US rates high and rising fast, at least in comparison with Japan and the eurozone, the dollar was able to break its three-year losing streak.
This week’s US numbers, from strong durable goods orders, consumer confidence and housing sales, to yesterday’s GDP data, which showed annualised growth of 4.8 per cent in the first quarter, attested to the fact that economic prospects are still brighter in the US than other industralised nations.
Yet the dollar extended its April sell-off, falling 2.1 per cent to an 11-month low of $1.2622 to the euro, 2 per cent to $1.8218 against sterling and 2.4 per cent to SFr1.2408 versus the Swiss franc, both seven-month lows, 1.6 per cent to a three-month low of Y113.80 against the yen and 1.4 per cent to C$1.1201 against the Canadian dollar, a 28-year low.
“The dollar is benefiting progressively less from rate hikes as other countries lift rates,” concluded Jeffrey Young at Citigroup. “Better growth prospects outside of the United States are attracting the attention of investors who shipped capital into the US at record rates last year.”
In truth there were other plenty of other dollar bearish factors in evidence. Alongside yesterday’s GDP data it emerged that the core personal consumption expenditures index, the Federal Reserve’s preferred measure of inflation fell from 2.4 to 2 per cent. On Thursday Ben Bernanke, the Fed chairman, had hinted that the Fed might pause after one more rate rise in May.
Fears over rising tension between the US and Iran also hit the dollar yesterday.
Furthermore, the final communique from last weekend’s G7 meeting, which called for greater currency flexibility in emerging Asia to help reduce global imbalances, namely the US current account deficit, also led to expectations that the dollar might finally weaken against Asian currencies.
Indeed this happened - for an entire 24 hours - before Japan started complaining about the speed of the move and South Korea backed up its own complaints with a wall of intervention to stop the won from strengthening.
The issue of central bank reserve diversification away from the dollar also re-emerged yesterday when Finland said it had sold Swedish kronor and Danish kroner and bought euros.
A week earlier Sweden said it too had bought euros (and sold dollars), and there is increasing speculation that banks with far greater reserves could follow suit.
“There could be more of this stuff going on, which is basically pro-euro,” said Tony Norfield, global head of FX strategy at ABN Amro. “Two of the smaller guys have done something and there are plenty more to go.”
The Swiss franc was the strongest major currency, rallying 0.8 per cent to SFr1.5666 to the euro yesterday, on upbeat data and rate talk and the Swissie’s traditional “safe haven” status amid the US-Iran stand-off.
By Steve Johnson
Published: April 28 2006 11:23 | Last updated: April 28 2006 17:41. Copyright by The Financial Times
The US dollar suffered a second week of sharp losses, despite the release of a tranche of broadly upbeat data releases, adding weight to the view that regime change is afoot in the currency market.
Yield differentials have been the prime driver of currencies since the start of 2005. Thus with US rates high and rising fast, at least in comparison with Japan and the eurozone, the dollar was able to break its three-year losing streak.
This week’s US numbers, from strong durable goods orders, consumer confidence and housing sales, to yesterday’s GDP data, which showed annualised growth of 4.8 per cent in the first quarter, attested to the fact that economic prospects are still brighter in the US than other industralised nations.
Yet the dollar extended its April sell-off, falling 2.1 per cent to an 11-month low of $1.2622 to the euro, 2 per cent to $1.8218 against sterling and 2.4 per cent to SFr1.2408 versus the Swiss franc, both seven-month lows, 1.6 per cent to a three-month low of Y113.80 against the yen and 1.4 per cent to C$1.1201 against the Canadian dollar, a 28-year low.
“The dollar is benefiting progressively less from rate hikes as other countries lift rates,” concluded Jeffrey Young at Citigroup. “Better growth prospects outside of the United States are attracting the attention of investors who shipped capital into the US at record rates last year.”
In truth there were other plenty of other dollar bearish factors in evidence. Alongside yesterday’s GDP data it emerged that the core personal consumption expenditures index, the Federal Reserve’s preferred measure of inflation fell from 2.4 to 2 per cent. On Thursday Ben Bernanke, the Fed chairman, had hinted that the Fed might pause after one more rate rise in May.
Fears over rising tension between the US and Iran also hit the dollar yesterday.
Furthermore, the final communique from last weekend’s G7 meeting, which called for greater currency flexibility in emerging Asia to help reduce global imbalances, namely the US current account deficit, also led to expectations that the dollar might finally weaken against Asian currencies.
Indeed this happened - for an entire 24 hours - before Japan started complaining about the speed of the move and South Korea backed up its own complaints with a wall of intervention to stop the won from strengthening.
The issue of central bank reserve diversification away from the dollar also re-emerged yesterday when Finland said it had sold Swedish kronor and Danish kroner and bought euros.
A week earlier Sweden said it too had bought euros (and sold dollars), and there is increasing speculation that banks with far greater reserves could follow suit.
“There could be more of this stuff going on, which is basically pro-euro,” said Tony Norfield, global head of FX strategy at ABN Amro. “Two of the smaller guys have done something and there are plenty more to go.”
The Swiss franc was the strongest major currency, rallying 0.8 per cent to SFr1.5666 to the euro yesterday, on upbeat data and rate talk and the Swissie’s traditional “safe haven” status amid the US-Iran stand-off.
posted by Carlos T Mock at 9:39 AM
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