Currency Update

The dollar moved higher again yesterday, this time not due to a correction in oil prices, but actually caused by some good new out of the US economy. Durable good orders (excluding aircraft) jumped 4.5%, showing a level of activity which has surprised the markets, who expected much less, and coupled with yet more inflation talk from a Fed member, this time from Stern who said that inflation is ‘too rapid for comfort’, has pushed the Euro back to under 1.56 against the US Dollar. There is also a growing feeling that the Fed and the government have done enough to stave off the worst scenarios of a recession, with rapid rate cuts and there is upcoming tax rebates comprising 1.1% of GDP which will stimulate the economy as long as those receiving the money spend it.

The Euro itself suffered as yet more weak economic confidence reports came out, this time from France, which doesn’t bode well for tomorrow’s Eurozone confidence figures. The Eurozone current account deficit also widened in March, as declining exports may be a further sign that the strong Euro is putting the pressure on European businesses. All of which dropped the Euro, and allowed the Pound, without any impetus of it’s own, to climb back above 1.26. The Pound has slipped as overnight the Nationwide house price survey showed a 7th consecutive monthly fall in prices taking the annual price change to -4.4%. The annual figure is only going to get worse as last year’s months of rises slip away and are replaced by months of price drops. Lenders continue to restrict their products and raise costs to borrowers, so house prices could get significantly worse before they get better.

As we’ve had a few days of relative stability with the Dollar on the front foot, risk appetite has started to recover which has given the, still relatively high yielding Pound, some support. However it has offered little to the antipodean Dollars, the usual beneficiaries. This is likely due to a small fall in the price of industrial metal prices and gold, both of which are very influential to Australia’s economy. The New Zealand Kiwi, has seen a rise over the last couple of weeks as fears of inflation have overcome a desire to see interest rate cuts. The government has attempted to give the economy a kick start by cutting taxes rather than rates, which has given the currency some support.

We have the only significant release this week for the UK today in the CBI may distributive trades report. This is likely to show retailers struggling with the current conditions on the high street, however with inflation, and the spectre of stagflation, hanging over the economy, the MPC are unlikely to cut rates any time soon. In the afternoon we get US weekly jobless claims, and a revision of Q1 GDP. The GDP figure may be revised upwards with some data on construction and consumption not as bad as first thought, which may give the Dollar further support.