2/22/2008
The US dollar weakened against a basket of currencies after US data yesterday showed the weakest regional factory activity since the last recession. The Philadelphia Fed's business index fell to minus 24 which was much worse than the forecasted minus 11, and reflected the deepest contraction in activity since 2001. This report boosted expectations for aggressive rate cuts of at least 50 basis points, and a small chance of a 75 basis point cut to help alleviate the US falling into recession.
The Euro strengthened against the dollar after stronger than expected euro-zone service sector growth and disappointing US Philly Fed factory activity data. The euro-zone services PMI index rose to 52.3 in February from 50.6 in January. This rise pushed it past the 50 watermark level which distinguishes between contraction and growth and dampened views of near-future rate cuts by the ECB.
The British pound rode on the stronger than expected UK retail data from the previous session and maintained its gain against the dollar. With robust retail sales data bucking trends of soft economic data in the past few months, investors pared back forecasts of rate cuts in the first half of the year.
The Japanese yen strengthened against the dollar as daunting Philadelphia Fed business index figures was released. The yen also drew some support from weaker equity markets, and shrugged off news that the Japanese government had lowered its assessment of the economy for the first time in 15 months.
The Canadian dollar capped any gains against the US dollar after reports showed December retail sales were weaker than forecasted. The Canadian retail sales rose 0.6 % in December which was lower than the 0.8 % median forecasted. This report increased the chance of a 50 basis point rate cut by the Bank of Canada at its next meeting, bringing down the 4 % benchmark interest rate to 3.5 %.
The Australian and New Zealand dollars strengthened against the US dollar, as investors' optimism the interest-rate advantage between the two nations over the US will widen. The Aussie dollar has maintained its performance against a basket of currencies on expectations of further increase in interest rates and a surge in gold prices. Both the Aussie and the kiwi has benefited from a partial revival of carry trades.
Union Bank of California
The Bank of Tokyo-Mitsubishi Group
Posted in: Forex
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