Overall strategy
Overall strategy: The dollar will be unsettled by mortgage related difficulties, although the overall yield considerations should still offer some protection near current levels with underlying growth still holding firm. Demand for defensive currencies should increase over the next few weeks as a whole with global credit conditions liable to tighten. This underlying trend will continue to be punctuated by periods of strong carry trade interest and high-yield currency gains.
Key events for the forthcoming week
Date | Time (GMT)
| Data release/event |
Tuesday July 17th | 08:30 | UK consumer prices |
Wednesday July 18th | 12:30 | UK consumer prices |
Dollar
Mortgage fears will remain a negative influence on the US currency. Although the underlying trade deficit is stabilising, the dollar still needs substantial capital inflows and further stresses in mortgage related bonds would tend to weaken inward capital flows. The economic data as a whole has still indicated firm growth and this should help curb dollar selling, especially as high energy prices will reinforce Federal Reserve determination to maintain a restrictive interest rate policy. Overall, the dollar should be able to resist further heavy short-term selling pressure, but with fragile sentiment limiting recoveries.
The US dollar came under significant pressure during the week with record lows against the Euro close to 1.38 while the trade-weighted index also tested 30-month lows.
The dollar was unsettled by renewed mortgage fears over the week. Ratings agencies moved to downgrade mortgage related bonds which increased unease over the sector. Fears over a prolonged downturn in the housing sector also increased after a profits warning from Home Depot group.
Following the ratings downgrades, there were also concerns over reduced US corporate bond buying by overseas investors.
The labour-market data was firm with jobless claims falling to 308,000 in the latest week from 320,000 which provided some further reassurance over the employment trends.
The US trade deficit rose to US$60.0bn in May from US$58.7bn the previous month. Imports and exports both rose significantly over the month with oil imports rising on increased volumes and prices.
Gains in the Kuwait dollar increased fears over wider Middle East dollar selling and unsettled the currency.
Euro
There is no sign at present that the ECB will shift away from a tough policy and the bank will aim to increase interest rates again by October at the latest. Near-term data has remained generally favourable and the German economy should remain robust. Euro-zone growth overall is liable to falter which will increase pressure for an extended pause in monetary tightening. There will also be a risk of more robust French protests against Euro strength which would undermine investor confidence in the currency.
The Euro has retained a firm tone during the latest week, securing an advance against most of the major currencies as well as the record high against the dollar.
The ECB continued to take a tough stance on monetary policy in public statements this week while the monthly central bank report was also strong.
The French industrial production figures were weak, but wider Euro-zone data was still relatively firm.
The German government rejected French calls for action to stem Euro gains while ECB officials in general expressed confidence that currency strength was not damaging the economy at current levels.