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The Dollar Swoons in the Shadow of Rising Commodity Prices
Market Brief
The Dollar squeezed higher as Tokyo returned from a four day holiday. Volume remained light nonetheless keeping trading relatively subdued. The greenback received a boost following comments by Kansas City Fed President, Hoenig, who stated that interest rates will eventually need to be raised to combat rising inflation and that the Fed might have gone too far in it’s credit easing policy after the recent aggressive moves.
With the Eurozone economy showing signs of a slowdown we could be at the bottom of the cycle in the Usd/Euro interest rate differential. Yesterday saw the Euro dip to 1.5489 versus the dollar from 1.5538 on Hoenig’s comments.
The Dollar rose from 104.67 to 104.96, which was a two month peak, in what was a very quiet market. The Nikkei was also numb as it remained virtually unchanged at 14,040, which was near Friday’s close.
The pound had on the other hand a difficult day. The Sterling dipped to 1.9682 from 1.9735versus the dollar as U.K. consumer confidence fell to its lowest level in four years. The weakening housing market and higher living costs were the main reasons that depressed shoppers according to the Nation wide survey (Nationwide's consumer confidence index fell to 70 last month from 77 in April. That was the lowest since the survey began in May 2004). Together with this there was disappointing news from the Purchasing Manager’s index which dropped from 62.1 in March to 50.4 – the lowest it has reached since 2003. there were also worrying signs for the employment numbers - job placement survey - which showed vacancies for permanent staff were at their lowest level since mid-2003. The survey also showed the weakest rate of growth in pay in nearly five years. All this was translated by a decline of the pound versus the euro to £.7870.
Both the ECB and the BOE will be making interest rate decisions tomorrow; and the consensus is that they will both maintain them at their current levels. The only speculation is on how the Bank of England will react following the spate of gloomy data that came out yesterday. Many analysts believe that there could be a rate cut by 0.25%.
Elsewhere, the expected moderate slowdown in the New Zealand economy may be sharper if the credit crisis is believed to trigger a broad based global slowdown. The Reserve Bank of New Zealand said the economy was already slowing, particularly the housing market, which could on the one hand unwind imbalances in the economy, but also leave the economy more exposed to adverse shocks from outside.
The price of oil and commodities remains a major concern for governments. Oil was trading just below the $122 barrel area. Yesterday Goldman Sachs published a report that speculated that the crude oil could reach levels of $200 in the near term. The report underlined the disruption in Nigeria, the fall in production within the Russian federation and the rise in demand in China, currently heightened by the Olympics. Other commodity prices also rose across the board. Rice prices spiked higher in the wake of the disaster in Myanmar, and this after having tripled in price this year alone so far.
In today’s news watch for U.S. new home sales report this afternoon but earlier in the day Eurozone retail sales maybe of interest.
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