by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar found some support close to 1.5570 against the Euro on Tuesday and edged stronger in European trading.
Headline US retail sales fell 0.2% in April, in line with market expectations, while the underlying figure was stronger than expected with a monthly increase of 0.5%. Auto sales dipped sharply, but there were some areas of strength with a recovery in building materials sales.
Fed Governor Fisher expressed concern over the inflation outlook, although he was also cautious over growth trends. The data will maintain a slightly more optimistic tone over the US economy and futures markets continued to price out a further interest rate cut for the June FOMC meeting.
The dollar strengthened to highs around 1.5430 following the US retail sales data, but was unable to sustain the advance and drifted back to 1.55.
The Euro was hampered by further dollar-supportive rhetoric by European and US officials. EuroGroup head Juncker stated that G7’s message had finally been heard and that he hoped the trend would continue which clearly suggested that officials are looking for the US currency to recover further. Fed Governor Fisher also stated that the dollar should strengthen. Following the rhetoric, the Euro edged weaker to around 1.5480, but with no decisive move as Euro-zone growth fears persisted.
Asian equity markets had a firmer tone on Tuesday and risk appetite was generally stronger which provided support to the US dollar, but it was unable to make any headway above the 104.0 level and drifted back towards 103.60 as the yen advanced against the Euro.
The US currency advanced further following the US data and the yen was also undermined by comments from Fed Chairman Bernanke who stated that financial-market conditions were generally improving, although he also stated that market conditions were far from normal.
Overall risk appetite strengthened during the day and the dollar pushed to a high of 104.75 in New York as there was fresh market interest in carry trades.
The growth-related UK data remained very weak with the RICS reporting that a record 95.1% of surveyors reported a drop in house prices for April following a reading of -79.4% the previous month while like-for-like retail sales fell a further 1.5% in the year to April according to the BRC survey.
The data kept Sterling under pressure in early Europe on Tuesday at below 1.96 against the dollar while is was also weaker than 0.7950 against the Euro.
The consumer inflation rate rose sharply to 3.0% in April from 2.5% previously and in contrast to expectations of a 2.6% rate, while the RPI rate also rose sharply to 4.2% from 3.8%. The sharp rise to 1.0% above the 2.0% Bank of England target will make it very difficult for the bank to sanction an interest rate cut, especially as the bank will have to write an explanatory letter to the government if there is any increase to above 3.0%. Despite major fears over the growth outlook, there will be pressure for the bank to resist a rate cut in June.
The inflation pressures will offer some Sterling support and it jumped stronger following the data, but the currency then retreated sharply as there were renewed fears over a steeper downturn in the economy and recession fears are liable to increase.
The Euro pushed to highs near 1.63 against the Swiss currency on Tuesday. Although it weakened back to 1.6265 as Wall Street failed to sustain an initial advance, the franc remained subdued in US trading and the dollar held above the 1.05 level.
The franc was unsettled by a recovery in risk appetite as Fed officials were generally optimistic that the credit crunch was at least easing.
There was some speculation that the gap between Euro and Swiss interest rates would narrow over the next six months and this will provide some near-term franc support even though international trends are liable to dominate.
There was also a general recovery in risk appetite on Tuesday which provided support to the Australian currency. There were no significant domestic developments on Tuesday with the Federal budget not having a major impact on currency levels.
Underlying caution over the economy and fears over a slowdown are likely to limit the support from any sustained interest in carry trades.
Risk tolerances improved during the day and the Australian dollar strengthen against the yen, but it failed to make any headway against the US currency, holding close to 0.94.