by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The moves in oil and gold prices were again closely tied with the dollar trend during the day. Oil prices recovered temporarily after the latest US inventory data which recorded a sharp decline in stocks, but this reflected temporary disruption to shipments and prices retreated again to fresh daily lows later in New York trading. Gold prices also fell sharply which underpinned the US currency.
The US data was close to expectations and failed to have a significant market impact. The first-quarter GDP estimate was revised to 0.9% from the previous estimate of 0.6% with personal consumption also in line with expectations as exports rose.
Initial jobless claims were also little changed at 372,000 in the latest week while continuing claims continued to increase which suggests that the economy is still weak, but not showing any renewed signs of deterioration at this stage.
The dollar was gained some support from a rise in yields as bond markets weakened. The US currency was also gaining support from comments by Regional Fed president Fisher who stated that the Fed should act sooner rather than later to increase interest rates if there was a further increase in inflation expectations. The impact will be offset to some extent by the fact that Fisher is one of the most hawkish Fed members and any evidence of renewed economic deterioration would be damaging.
The German labour-market data was weaker than expected with a 4,000 increase in unemployment for April compared with expectations of a further decline. Consumer confidence also deteriorated for the month, although overall business confidence was stable for the month. Unease over the Euro-zone outlook will continue to unsettle the Euro in the short term.
The Nikkei index rallied strongly on Thursday which reinforced international interest in carry trades. The yen was undermined briefly by rumours that North Korean leader Kim Jong-Il had died, but these reports were quickly denied.
Domestically, retail sales rose 0.1% in the year to April, but the underlying data was weak with sales boosted by the increase in spending on fuel. The dollar retained a firm tone on Thursday and was holding just below the 105.0 resistance area before attempting renewed gains in European trading.
The US currency resisted a decline through the 104.50 level and re-tested important resistance levels around 105.30 in New York. A break of this level triggered a further dollar move to 105.80 later in US trading before consolidation around 105.55.
The UK housing data remained extremely weak with the Nationwide Bank reporting a further 2.5% decline in prices for May to give a 4.4% annual drop which was the largest annual decline sine the series started in 1992.
In response, Sterling dipped to lows below 1.97 against the dollar, but showed some resilience against the Euro.
The latest CBI retail survey showed that sales weakened again in May, but there was greater confidence over June’s outlook. A key feature was the strongest reading for the prices component since 1992 which will reinforce Bank of England inflation fears.
Degrees of risk appetite again had an important impact on the UK currency and a shift away from more defensive currencies helped underpin Sterling with gains to highs around 0.7850 against the Euro.
The dollar found support just above 1.0360 against the franc on Thursday and strengthened to highs around 1.0520. The Swiss currency was also generally on the defensive against the Euro and tested levels around 1.63.
As energy prices fell, overall risk appetite improved with reduced fears over a combination of very weak growth and rising inflation. A scaling back of these fears helped reduce immediate safe-haven demand for the franc with yield considerations a greater market factor.
There was significant Australian dollar buying support on dips in local trading on Thursday as overall confidence remained firm. There was renewed interest in carry trades with the Australian currency strengthening against the yen.
Domestically, there was weaker than expected first-quarter investment spending, but this did not have a major impact. Although sentiment remains firm, the Australian currency will remain vulnerable if there is a sustained decline in commodity prices. The currency was unable to hold above the 0.96 level and a sharp decline in metals prices pushed the Australian dollar to lows below 0.9550 in New York.