by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar strengthened in Asian trading on Thursday with gains back towards 1.5440 against the Euro. The US currency was boosted by a proposed US$46.3bn bid by Belgian group InBev for US brewing group Anheuser-Busch which reinforced optimism over potential capital inflows.
The US retail sales data was stronger than expected with a 1.0% increase for May after an upwardly-revised 0.4% increase previously while there was also an underlying increase of 1.2% for the month. Within the data, there was a second successive increase in building material sales which is likely to prompt some optimism over housing trends.
There was an increase in initial jobless claims to 384,000 in the latest week, although this may have been distorted by the Memorial Day holiday.
The net result of the data was a further increase in Treasury bond yields as 10-year yields rose to above 4.20% while markets continued to price in a series of interest rate increases by the Federal Reserve. The dollar strengthened to highs around 1.5380 against the Euro, but was unable to break resistance around this level and settled around 1.5420.
Import prices rose by a further 2.3% in May, illustrating the upward pressure on prices. Inflation trends will also be a very important focus on Friday with the monthly consumer prices data. A higher than expected increase in prices would reinforce speculation that the Federal Reserve would be forced to increase interest rates to help combat inflationary pressure.
A monthly increase in Euro-zone industrial production of 0.8% for April provided some degree of relief to the Euro. The result of the Irish Lisbon Treaty referendum will also be watched closely on Friday and a no vote would tend to weaken the currency slightly.
Higher volatility is likely to remain the key short-term market element and the US currency recovered back above 107.0 against the yen in Asian trading on Thursday with a push to 107.60.
The latest capital account data recorded strong net inflows into Japan for the second successive week and this should offer some significant yen protection, especially if there is a further retreat in global stock markets.
Nevertheless, overall dollar confidence strengthened following the US data and the US currency strengthened to test 15-week highs above the 108.0 level before hitting tough resistance. The yen regained some ground as Wall Street retreated from strong early gains.
Sterling was again unable to sustain a move through the 0.7900 level against the Euro on Thursday and consolidated around 0.7920. The UK currency dipped to a four-week low against the dollar near 1.9430 before a slight recovery.
The latest quarterly Bank of England inflation survey recorded an increase in the 12-month expected rate to a 9-year high of 4.3% from 3.3% previously. The sharp increase will reinforce inflation fears within the central bank, especially as the control of inflation expectations is seen as crucial for the MPC. There will be some speculation that rates will be forced to increase to combat rising prices.
Overall confidence in the economy will remain very weak in the short term which will continue to limit the scope for Sterling buying support.
The Swiss currency was undermined by the better than expected US data on Thursday and the dollar pushed to challenge levels close to the 1.05 level before drifting back to 1.0425 later in US trading.
A recovery in global stock markets lessened immediate demand for the Swiss currency with the franc blocked close to 1.60 against the Euro.
The rise in US yields will tend to underpin the dollar in the near term, but the impact will be offset by unease over global growth conditions, especially if stock markets are put back on the defensive. The net result is likely to be a sustained increase in volatility.
The domestic data offered no support for the Australian currency on Thursday with an employment decline of 19,700 for May compared with expectations of a significant increase. The unemployment rate was also higher than expected at 4.3% which will reinforce fears over a sharp slowdown in the economy.
Equity markets were also generally under pressure on Thursday which undermined the currency and it weakened to below the 0.94 level against the US currency with a low near 0.9325. Commodity prices rallied later in US trading, but the Australian dollar was unable to take advantage and was trapped close to 0.9340.