The U.S. dollar succumbed to additional selling pressure overnight, falling to a new three-month trough against a basket of its major counterparts. Another batch of solid euro zone economic data overnight contrasted the largely disappointing U.S. news of late and played up concerns that America’s recovery is losing momentum. Double-dip recession concerns have depressed yields on U.S. bonds across the curve, which dampens the appeal of dollar-denominated assets for global investors. Thin summertime trading volumes and technical factors have exacerbated the greenback’s broad-based weakness.
Strong German labor data and a steep rise in euro zone economic sentiment added to a long list of improving data from the 16-member bloc, which has contrasted the soft figures on this side of the Atlantic. Economic resilience in Europe, particularly in Germany, despite the formidable sovereign credit headwinds, continues to fuel an unwinding of bets against the euro and push it higher across the board.
Sterling continues to ride the wave of generally positive domestic economic news and the broad improvement in global investor sentiment. Firmer equities have added to the appeal of the pound, as has the general malaise surrounding the greenback.
The dollar bloc group of currencies from Australia, New Zealand and Canada continue to outperform, broadly supported by the market’s buoyant mood and generally elevated commodity prices. The kiwi lagged its counterparts within the group after the RBNZ raised interest rates by 25 basis points late yesterday but signaled a slower pace of tightening going forward.
Investors await the release of U.S. weekly jobless claims and Canadian wholesale inflation data later this morning.
EUR: The euro jumped to a new 11-week high against the broadly softer U.S. dollar overnight. A string of solid data has underpinned the euro and helped assuage concerns about sovereign credit risk in peripheral euro zone economies. Light trading volumes and the breach of key technical resistance against the dollar have helped the single currency build momentum in recent weeks. Overnight, data showed the number of unemployed Germans fell by 20,000 in July, in-line with market expectations. The unemployment rate in the bloc’s largest economy fell to 7.6%, also in-line with forecasts. Separately, economic sentiment in the euro zone jumped to its highest level in 28 months in July, buoyed by positive signs of recovery in Germany. While the euro is likely to enjoy continued support over the near-term, especially if U.S. data remains weak, its upside may prove limited if concerns about a slowing U.S. economy widen to include the broader global economy. Moreover, the divergence in growth between Germany and smaller economies within the euro zone presents new challenges to ECB officials, who must work within the bloc’s one-size-fits-all monetary system.
GBP: Sterling hit a new five-month peak against the dollar overnight as strong domestic data and positive equity markets have underpinned demand for the pound. Broad USD weakness and thin trading volumes have added to the pound’s recent strength. Additional signs of weakness in the U.S. will continue to support the pound, until a point when investors become more concerned with the global economic outlook. Then, the resulting pullback in risk appetite and increased demand for safer assets is likely to leave the pound vulnerable.
NZD: The kiwi managed to firm in overnight trade against the broadly weaker dollar, but its upside remained limited by moderating expectations for additional policy tightening from the Reserve Bank of New Zealand (RBNZ). Officials expectedly raised lending rates yesterday by another 25 basis points to 3.00%, but said that the pace and extent of further rate hikes would be more moderate. The NZD could suffer if investors see RBNZ rates as having peaked for 2010.
CAD: Canadian wholesale inflation fell by 0.9%(M/m) in June, confounding expectations for no change. Ex-energy, prices fell by 0.6%(m/m). Cooler inflation data takes pressure off of the Bank of Canada to raise rates further, diminishing the yield appeal of the CAD. The loonie traded lower following the data.
USD: Weekly jobless claims fell by 11,000 to 457,000 last week, in-line with expectations. Continued claims rose slightly but remained near the 4.5 million mark. The numbers were mildly positive but continue to paint a picture of a labor market that is largely stagnant. The dollar firmed slightly off of its lows following the data.