USD - The Greenback Rebounds for the First Time in 3 Days
The U.S currency climbed versus the EUR on Tuesday and recovered against other major currencies after a drop in equities and the Institute of Supply Management's survey of service businesses showed that sector of the economy contracted at a slower pace last month. The ISM's non-manufacturing index rose more than analysts expected to 43.7 in April, from 40.8 the previous month. That's the highest reading since October. Investors began selling the EUR after it hit a monthly high near $1.3440 amid uncertainty about Thursday's European Central Bank meeting and results of stress tests on U.S. banks. The USD advanced 0.8% to $1.3280 per EUR from $1.3406 yesterday. The Dollar also gained 0.2% to 98.97 yen, from 98.80.
The Dollar increased versus the EUR after Federal Reserve Chairman Ben S. Bernanke said the U.S. economic contraction may be easing and a report showed services industries shrank at a slower pace. Optimistic comments from Federal Reserve Chairman Ben Bernanke and a slower pace of contraction in the service sector have helped to drive the U.S. Dollar higher.
Bernanke's remarks before the congressional Joint Economic Committee echoed last week's central bank statement that the economic outlook has improved since March. The Dollar had been under some pressure in the past 4 weeks and was traded in a range of $1.2886 to $1.35 per EUR. However, the greenback is likely to rebound further and advance to $1.30 by the end of the second quarter, according to analysts.
EUR - The ECB May Rates Near Zero Percent
The European single currency retreated slightly off of a monthly high versus the Dollar ahead of a meeting on Thursday of European Central Bank (ECB) policy makers. Some in the market said they were wary of taking on too much risk ahead of Thursday's policy announcements by the ECB and the Bank of England (BOE).
The Euro-Zone currency fell on speculation the Central bank will cut Interest Rates tomorrow and announce plans to buy debt as part of an initiative to end the region's recession. The ECB is expected to cut its benchmark rate to a record low 1%, while the BOE is seen holding rates steady at 0.5%, which is also a record low for Britain.
More importantly, market players want to see whether the ECB suggests it will keep cutting Interest Rates along with adopting non-conventional policy measures such as buying long term government securities to stimulate growth. Therefore, the EUR could resume its rally if the ECB opts not to follow the Fed and adopt non-standard monetary policy.
JPY - The Yen Pares Its Losses Versus the USD
Japan's currency rose against the greenback by the most in more than a week after Reuters reported the government review will show Bank of America Corp. needs $34 billion in new capital, citing a person familiar with the results. The Yen rose as much as 0.8% to 98.17 against the Dollar, the most since April 24. The currency also rose 1.2% against the EUR, to 130.09 from 131.73 in New York yesterday.
The Japanese currency gained as the Fed plans to deliver results of stress tests on U.S. banks that may show about 10 companies in need of additional capital. Economists said that the bank stress tests might rattle market confidence and the recent outbreak of optimism might be due for its own stress test.
OIL - Crude Retreats After Touching 2009 High
Crude Oil prices declined on Tuesday as bulging Oil inventories and falling energy demand outweighed fragile hopes for an economic recovery. Analysts said that even though Oil markets are trading near their highs of the year so far, the market still feels nervous about sustaining these levels. The price settled yesterday 63 cents lower at $53.60 a barrel, after hitting a high for the year of $54.83 a barrel.
Oil prices have recovered from $32.40, the lowest since early 2008. Yet prices remain down sharply from the record high above $147 reached in July, 2008. The slumping economy has battered Crude demand, driving up stockpiles and sending prices down from their record highs. However, improvements in the leading economic indicators increase traders' confidence that a return to sequential economic growth in second half of 2009 will likely support a rise in Crude Oil prices to as high as $65 a barrel.
Article Source - Dollar Breaks Losing Streak
Key Overnight Developments
• UK Consumer Confidence Tops Forecasts But Outlook Remains Bleak
• Australian Dollar Plunges Despite Improved Retail Sales, Trade Balance
• Rumors Hint Stress Tests to Show Bank of America Needs Most Capital
The Euro slipped -0.6% against the US Dollar, reaching as low as 1.3247. The British Pound followed suit, shedding 0.7% to test below the 1.50 level once again.
Asia Session Highlights
UK Consumer Confidence unexpectedly surged to register at 50 in April from 41 in the previous month according to the Nationwide Building Society (economists had forecast a reading at 42). Details of the survey reveal that while 80% of respondents would characterize the current environment as “bad”, in line with the average result over the previous 6 months, the spread between those expecting worse and those expecting better economic conditions in the future shrank to just 6%, the smallest margin at least since September. Further, the number of respondents that reckon economic conditions will remain the same in the immediate future surpassed that of those expecting the worst is still ahead for the first time in at least 7 months. On balance, this is not as good as it sounds: the status quo is far from rosy considering the UK economy shrank at an annual pace of -4.1% in the first quarter and is forecast to shed -4.4% in the three months through June. Ominously enough, the data revealed that a 68% of respondents see insufficient available jobs today and 62% expect this to remain the case going forward. The jobless rate is seen topping 8% in 2009 and reaching as high as 9.4% in 2010.
The Australian Dollar tumbled against its US counterpart, testing as low as 0.7337, despite seemingly positive surprises in March economic data. Retail Sales surged 2.2% from the previous month, four times more than economists expected, while the Trade Balance surplus printed at A$2.5 billion versus forecasts calling for a A$1.7 billion result. The details of the reports reveal a far grimmer reality than the headline figures would suggest. The jump in retail activity in and of itself likely owed to fiscal stimulus: the government has provided every Australian with A$950 in cash handouts since March. The breakdown in spending patterns is quite telling: department store and apparel sales raced higher, adding 13.2% and 6.4% from the previous month; meanwhile, discretionary spending (food, eating out) as well as bigger-ticket items (household goods) remained conspicuously tame. This suggests that Australians chose to spend their stimulus money to stock up on relatively more durable essentials (like clothing) but eschewed larger purchases and optional expenses, hinting that the handouts were seen as a one-off income boost, reflecting expectations of lower spending power in the months ahead and painting a bleak picture of consumer sentiment. The outlook on consumption was made even darker considering the improvement in trade figures came as imports fell on weak demand for foreign-made products rather than robust overseas sales. Indeed, inbound shipments shrank -0.38% in the year to March, the first contraction in 5 years. The fact that this happened even as the local currency advanced, boosting Australian’s purchasing power, makes things all the more negative.
Fears that today’s Australian releases are representative of a larger global trend revealing the recent improvements in headline economic indicators mask continued weakness weighed on risky assets, boosting the US Dollar. Confidence was eroded further as rumors that Bank of America is the most undercapitalized of the 19 major institutions undergoing stress tests, raising questions about the durability of any sustainable economic recovery amid continued turmoil in the financial sector. The MSCI Asia Pacific Index fell 0.5% and US equity index futures slipped 1%.
Euro Session: What to Expect
Euro Zone Retail Sales are expected to add 0.1% in March, suggesting the annual pace of decline moderated to -2.6% from -4.0% in the previous month. Any improvement will likely owe to a slew of fiscal stimulus packages put in place across the region to boost growth amid deepening recession. That said, a downside surprise is not out of the question as unemployment continues to rise, trimming disposable incomes and encouraging precautionary saving. Indeed, German retail sales unexpectedly fell during the same period, driven by similar considerations. Leading indicators continue to point to contraction in retail activity across the region, albeit at a slowing pace: Bloomberg’s Retail PMI, a survey of purchasing executives designed to gauge firms’ bets on future economic growth, remained firmly in contractionary territory both in March and April. The EU Commission’s latest economic forecast for the common market expects unemployment will rise to a staggering 11.5% next year, suggesting any near-term improvements in consumer spending are likely to be short-lived.
Written by Ilya Spivak, Currency Analyst
Article Source - US Dollar Rises on Australian Economic Data, Stress Test Rumors (Euro Open)
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The foreign exchange market (Currency, Forex, or FX) is where currency trading takes place. It is where banks and other official institutions facilitate the buying and selling of foreign currencies. Forex transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The foreign exchange market that we see today started evolving during the 1970s when world over countries gradually switched to floating exchange rate from their erstwhile exchange rate regime, which remained fixed as per the Bretton Woods system till 1971.
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