The US currency will continue to be unsettled by speculation over medium-term reserve diversification into alternative currencies and institutional bonds. The global central banks have a strong incentive to maintain relative currency stability in the short-term to help underpin a global recovery. In this context, there are likely to be further public comments in support of the dollar which should help limit losses even if underlying sentiment remains fragile.
Key events for the forthcoming week
Date
|
Time (GMT)
|
Data release/event
|
Monday June 22nd
|
08.00
|
Germany IFO index
|
Wednesday June 24th
|
18.15
|
US FOMC interest rate decision
|
Dollar:
Underlying confidence in the dollar will remain fragile with further unease over the threat of medium-term diversification. While risk appetite remains firmer, there will also be further expectations that defensive demand for the US currency will be lower. The impact will be offset by a narrowing of the current account deficit which will lessen the dependency on capital inflows while yield support is also still higher. The dollar can, therefore, still prove resilient in the short-term , although it will be difficult for the currency to make much headway.
The dollar struggled to make any great headway during the week, but it did again show some resilience in the face of underlying weak sentiment and consolidated just stronger than 1.40 against the Euro.
The latest US capital flows report recorded net long-term inflows of US$11.2bn for April from US$55.4bn the previous month. There was a decline in US Treasury holdings by many central banks during the month and this will maintain underlying unease over the risk of reserve diversification away from the US currency.
The current account deficit narrowed to US$101.5bn for the first quarter of 2009 compared with a revised US$154.9bn the previous quarter. The deficit is narrowing at a substantial pace, but both figures were significantly higher than expected. A narrower structural deficit will still provide some degree of dollar protection.
The US currency gained some support from assertions by global finance officials that the dollar will remain the dominant international currency with Russian Finance Minister Kudrin the latest official to voice dollar support.
The US housing data was slightly stronger than expected with starts rising to an annual rate of 0.53mn for May from a revised 0.45mn the previous month. There was a strong rise in multi-family starts which helped push the total higher while building permits also edged higher.
The industrial data was weaker than expected with a 1.1% production decline for May while there was a decline in the capacity use rate to 68.3% from 69.1% previously.
The US Philadelphia Fed index rose to -.2.2 for June from -22.6 the previous month which was sharply stronger than expected and the highest reading for nine months. The data caused significant relief, especially as the New York manufacturing index released earlier in the week, had registered a monthly deterioration
Elsewhere, initial jobless claims edged slightly higher to 608,000 in the latest reporting week, from 605,000 previously while there was a decline in continuing claims which will boost confidence that the labour market is starting to stabilise.
US consumer prices rose by 0.1% in May compared with expectations of a 0.3% monthly increase while the underlying rate was in line with expectations with a 0.1% rise. The weaker than expected headline increase and the largest annual decline since 1950 of 1.3% provided some support to risk appetite and curbed dollar demand. There were also reduced expectations that the Fed would consider an increase in interest rates which also tended to undermine the US currency. |