Euro Recovers Against US Dollar As US Optimism Fades

EURO

The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.5890 level and was supported around the $1.5810 level. Traders erased some of the common currency’s losses yesterday on concerns it will take a significant amount of time to work through this latest round of credit problems in the U.S. financial sector. The U.S. dollar was also lower on media reports that major sovereign wealth funds have trimmed their exposure to the U.S. dollar. Testimony from Federal Reserve Chairman Bernanke indicated beleaguered U.S. mortgage giants and GSEs Fannie Mae and Freddie Mac are not in any danger of failing and Bernanke added the containment of inflation remains a “top priority” for the Fed. Many dealers, however, believe Bernanke has not supported the U.S. dollar vocally enough in recent statements.

Data released in the U.S. today saw weekly initial jobless claims climb 18,000 to 366,000 while continuing jobless claims fell 81,000 to 3.122 million. Also, July housing starts were up +9.1% in June to an annualized 1.066 million units while June building permits came in at +11.6%. Also, the July Philadelphia Fed manufacturing survey improved to -16.3 from June’s -17.1 print. Minutes from the Federal Open Market Committee’s 24-25 June meeting were released yesterday and they revealed policymakers believe “some firming in policy would be appropriate very soon.” In contrast, others reported elevated risk spread and credit availability limits are “not especially accommodative.” FOMC members also upwardly revised their estimates for economic growth in H1 2008 on account of stronger-than-expected spending.

In eurozone news, the German government said the pullback in Q2 GDP growth may be “exaggerated.” European Central Bank member Wellink reported “Inflation expectations are changing for the short term. Those for the long term are still stable and low. We have to prevent long-term expectations changing. It’s a mistake to think that inflation will fall if the economy weakens. We have seen that too in the 70s. If you don’t act, you get high inflation and low growth, stagflation.” Euro bids are cited around the $1.5645/ $1.5230 levels.

JPN/CNY

The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥105.90 level and was supported around the ¥104.75 level. Stops were reached above the ¥105.75 level, representing the 50% retracement of the move from ¥107.75 to ¥103.75. Traders continue to speculate that Bank of Japan will keep its overnight call rate unchanged at 0.50% for at least several months. The government reported slowing economic growth will render it difficult for Japan to balance its public finances by the 2011-2012 fiscal year. Capital flows data revealed that foreigners purchased a net ¥528.2 billion of Japanese bonds last week. The Nikkei 225 stock index gained 1.00% to close at ¥12,887.95. Dollar bids are cited around the ¥103.65 level.

The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥167.55 level and was supported around the ¥166.00 figure. The British pound and Swiss franc appreciated vis-à-vis the yen as the crosses tested offers around the ¥211.75 and ¥103.80 levels, respectively.

The Chinese yuan depreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 6.8213 in the over-the-counter market, up from CNY 6.8113. Many economic data were released in China overnight. First, Q2 GDP was 10.1% y/y and H1 GDP was up 10.4% y/y. Second, June PPI was up 8.8% y/y and H1 PPI was up 7.6%. Third, June CPI was up 7.1% y/y and H1 PPI was up 7.9% y/y. The government reported Chinese economic growth will decelerate further in H2. Fourth, H1 industrial output was up 16.3% y/y. Fifth, H1 retail sales were up 21.4% y/y. Sixth, fixed-asset investment was up 26.3% y/y.

STERLING

The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 2.0060 level and was supported around the $1.9970 level. There were no major U.K. economic data released today. Traders focused on Barclays’ major US$ 4.5 billion rights issue, the bank’s latest attempt to raise capital to improve its balance sheet. New Bank of England Chief Economist Spencer Dale spoke last night and said he sees “substantially higher” CPI over the coming months on account of higher food and energy prices. He added “The possibility that the public’s longer-term inflation expectations may begin to drift upwards is a key risk affecting the inflation outlook and the efficient functioning of the economy more generally… It’s quite possible for the Bank of England…to raise interest rates very sharply, (but this) would run the risk of creating undesirable volatility in output.” Cable bids are cited around the US$ 1.9870/ 1.9360 levels.

The euro gained marginal ground vis-à-vis the British pound as the single currency tested offers around the ₤0.7935 level and was supported around the ₤0.7910 level.

SWISS

The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.0135 level and was capped around the CHF 1.0210 level. Technically, today’s intraday low was right around the 50% retracement of the move from CHF 0.9645 to CHF 1.0625. Data released in Switzerland today saw the ZEW economic expectations index fall to -76.9 in July from -63.8 in June. U.S. dollar offers are cited around the CHF 1.0395 level.

The euro and British pound gained ground vis-à-vis the Swiss franc as the crosses tested offers around the CHF 1.6160 and CHF 2.0420 levels, respectively.

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