The global economic trends and stresses within the financial sector will continue to have an important short-term impact. There are likely to be persistent fears over a tightening of credit conditions, which will provide some degree of dollar support, but the US currency has failed to benefit over the past few days. There has certainly been an important loss of support on yield grounds as US growth fears have increased and all major currencies have important vulnerabilities.
Key events for the forthcoming week
Date
|
Time (GMT)
|
Data release/event
|
Friday July 2nd
|
12.30
|
US employment report
|
Thursday July 8th
|
11.00
|
Bank of England interest rate decision
|
Thursday July 8th
|
11.45
|
ECB interest rate decision
|
Dollar:
The US economic data will reinforce fears that the economy will decelerate significantly during the second half of 2010, especially as there will be reduced fiscal support. There will be further speculation that the Federal Reserve will resist higher interest rates and will also decide to implement further buying of bonds to underpin the economy. These factors will tend to erode dollar support, especially given the decline in bond yields. There is still the potential for defensive US currency support, especially if global banking-sector liquidity tightens further. The dollar should, therefore, be able to resist heavy losses.
The dollar gained support over the first half of the week from defensive demand as risk appetite faltered. The US currency was unable to take full advantage and then came under renewed selling pressure with particular losses within Europe.
The US economic data was weaker than expected with jobless claims rising to 472,000 from a revised 459,000 the previous week. The ISM index for the manufacturing sector declined to 56.2 from 59.7 the previous month. There was a sharp decline in the prices component while the employment index held comfortably above the 50 level.
There was also a sharp 30% decline in pending home sales for May with sales weakened by the ending of tax credits. The ADP employment data was weaker than expected with private-sector payroll growth at 13,000 for June compared with expectations of a figure near 60,000.
The US consumer confidence data was significantly weaker than expected with a decline to 52.9 for June from a revised 62.7 previously as the expectations component weakened sharply while optimism surrounding the jobs market also faded.
The data overall maintained expectations over a slowdown in the economy during the second half of 2010. There will also be additional speculation that the Federal Reserve will need to take additional measures to support the economy.
Fed officials were also generally downbeat on employment prospects in comments during the week and this maintained expectations of low interest rates which will curb dollar yield support. There was speculation that additional bond buying may be required within the next few months.
In contrast to recent sessions, the dollar failed to gain any significant support when risk appetite deteriorated on Thursday. Demand for the currency was sapped by falling yield support and unease over the economy. |