Underlying confidence in the US dollar is likely to remain generally weak, especially with further speculation that the currency will be used as a global funding currency. Nevertheless, risk appetite is still liable to deteriorate over the next few weeks and this should provide some degree of US protection, especially with the currency at attractive valuation levels against the Euro.
Key events for the forthcoming week
Date
|
Time (GMT)
|
Data release/event
|
Wednesday September 23rd
|
08.30
|
UK Bank of England minutes
|
Wednesday September 23rd
|
18.15
|
US Federal Reserve interest rate decision
|
Dollar:
The dollar will continue to be unsettled by the familiar fears over underlying global central bank reserve diversification. There will also be fears over investment outflows while the currency is also more vulnerable to being used as a global funding currency. There are still major vulnerabilities in the global economy which should stem selling pressure while the domestic credit contraction should also provide some degree of dollar protection. The US currency will still tend to remain on the defensive in the near term, although losses should be contained from current levels.
The US dollar attempted to rally at times, but generally remained on the defensive with 12-month lows on a trade-weighted index while the US currency also weakened to 2009 lows against the Euro before a limited recovery.
The US data was generally stronger than expected with a 2.7% surge in retail sales for August. Although driven to a large extent by rising auto sales, there was also a 1.1% underlying increase. The New York manufacturing index also rose further to 18.9 in September from 12.1 the previous month
There was also a 0.8% production increase for August following an upwardly-revised 1.0% increase the previous month while capacity use rose to 69.6% from 68.5% as output in the auto sector strengthened. US housing starts rose to an nine-month high of 0.60mn for August from a revised 0.59mn the previous month while permits also edged higher over the month.
The Philadelphia Fed index also rose to 14.1 from 4.1 the previous month which was the highest reading since June 2007, although the underlying components were less reassuring and suggested that the recovery may prove brittle. Initial jobless claims fell to 545,000 in the latest week from 557,000 previously. The data continues to suggest an underlying US recovery, but that there are still important vulnerabilities.
Headline consumer prices rose 0.4% which was slightly higher than expected while there was a core increase of 0.1% for the month. Fed Chairman Bernanke stated that the recession had probably ended. Following recent comments from Fed officials, there was still only limited speculation that the central bank will push for higher interest rates in the short-term with expectations of a tightening later in 2010.
The headline US capital account data recorded net long-term inflows of US$15.3bn from a revised US$90.2bn the previous month. There was a significant increase in Chinese and Japanese US Treasury holdings for the month which will provide some degree of relief.
In contrast, there were net private-sector outflows of over US$130bn for the month. The private-sector outflows will pose important underlying risks to the dollar as it suggests an important increase in capital outflows from the US which have historically been important in undermining the currency. The second-quarter current account deficit edged lower to US$98.8bn from US$104.5bn previously. |