The medium-term outlook for the US currency will continue to be a very important area of debate in the short-term and underlying dollar confidence will remain fragile. The difficulties in other major currencies should still offer some important protection to the US currency, especially if there is general erosion in international risk appetite.
Key events for the forthcoming week
Date
|
Time (GMT)
|
Data release/event
|
Thursday July 23rd
|
12.30
|
US jobless claims
|
Friday July 24th
|
08.30
|
UK GDP (Q2 advance)
|
Dollar:
There will be some cautious optimism that the economy can secure a further near-term improvement as inventories are re-built. There are still very important sources of vulnerability, especially with unemployment set to rise further, while commercial-property stresses could also trigger further financial-sector vulnerability. Defensive dollar demand is liable to remain lower in the near term and there will be medium-term unease over reserve diversification into alternative currencies. Nevertheless, the dollar should still be able to resist heavy selling pressure during the third quarter.
The dollar posted gains early in the week, but was unable to break any important Euro support levels and was then on the defensive for much of the time. Risk appetite improved significantly which undermined demand for the dollar and the trade-weighted index dipped to a one-month low on broad selling before a slight recovery.
The US retail sales data failed to have a substantial impact as it was close to expectations. Headline sales rose 0.6% in June after a 0.5% increase the previous month while there was a 0.3% underlying increase. Overall confidence in the economy was still be fragile given the data breakdown and the latest IBD consumer confidence index recorded a monthly decline
The other growth-orientated data was mixed, but offered some degree of support with the New York Empire manufacturing index strengthening to -0.6 in July from -9.4 the previous month which was the strongest reading sine October last year. The decline in industrial output also slowed to 0.4% in June from a revised 1.2% decline previously while there was a further small decline in capacity use to 68.0% from 68.2%.
Initial jobless claims fell again to 522,000 in the latest week from a revised 569,000 the previous week. There was again a high degree of distortion from the auto sector as seasonal layoffs were lower than usual due in part to the number of job cuts already announced.
The Philadelphia Fed manufacturing index weakened to -7.5 for July from -2.2 the previous month as optimism over future business conditions deteriorated, although the orders component was at a 10-month high. The data will spark some degree of unease over industrial trends later in 2009.
US consumer prices rose 0.7% in June as gasoline prices rose sharply while there was a core increase in prices of 0.2% which was in line with expectations. Overall consumer prices still fell 1.4% over the year while there was a 1.7% underlying increase. The producer prices data was stronger than expected with a 1.8% monthly increase while core prices rose 0.5%
The latest capital account data recorded net long-term outflows for May of US$19.8bn compared with net inflows of US$11.5bn the previous month. Chinese Treasury holdings did increase over the month, but the net outflows maintained underlying market fears over a medium-term move away from the US currency.
The Federal Reserve minutes from June reported mixed views with a majority still very concerned over the economy, although there were also some increase in medium-term inflation fears. The Fed raised its 2009 GDP forecasts slightly, although the unemployment forecasts were also increased. |