Friday December 10, 2004 - 20:44:52 GMT
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Forex: Dollars Rallies On Higher Inflation and Stronger Confidence
DailyFX Forex Fundamentals 12-10-04
By Kathy Lien, Chief Strategist of www.dailyfx.com
· Dollars Rallies On Higher Inflation and Stronger Confidence
· Disappointing Eurozone Data Keeps Euro Weak
· Yen Extends Slide As Outlook For Growth Remains Dismal
Things are really turning sour for the euro. The tides have shifted slightly with France having a higher count of disappointing reports than Germany over the past few weeks. Unlike the better than expected industrial production reports that were released by Germany yesterday, industrial production contracted more than expected in France, while the trade deficit widenend to highest level in 10 years. Previously, economic growth in France was one of the most resilient in the Eurozone. Now however, the strong euro is slowing down the French economy significantly. Yesterday, Remy Cointreau SA said that fluctuations in currencies have played a big role in the 42% fall in profits. French consumer spending could also be threatened as the stronger euro could deter firms from hiring. Meanwhile, consumer price inflation slowed in both Germany and France during the month of November as oil prices retraced and the soaring euro lowers the cost of imports. The latest data contrasts with the ECB’s fears that inflation will tick higher in the months to come. In the meantime, this consolidation in the euro this past week should come to an end with a heavy economic calendar in the week to come. Dips so far in the euro have been relatively shallow, suggesting that any weak data will give euro bulls sufficient catalyst to rally the currency back towards previous highs.
Higher inflation and stronger consumer confidence has helped the dollar hold on to its weekly gains against the Swiss Franc and the Euro. Producer prices increased 0.5% in November, which was a sharp rise from the market’s forecast of 0.1%. Core PPI growth on the other hand, which excludes the more volatile food and energy components slowed from 0.3% to 0.2% m/m. Higher oil and raw material prices drove the cost of inputs higher for producers. However, the core rate increased by the weakest pace since July. Consumer confidence, as measured by the University of Michigan consumer confidence survey accelerated from 92.8 to 95.7, partially because the higher prices have had a limited pass through cost to consumers. Also rising stock prices and falling gasoline prices have helped to bolster optimism. The latest reports further solidify expectations for another quarter point rate hike by the Fed on Tuesday. The only reason Greenspan would have to keep rates unchanged is his eternal fear of being known as the “Grinch of Christmas.”
The British pound remained under selling pressure today amid residual sentiment of yesterday’s trade deficit data and the Bank of England’s decision to keep rates unchanged at 4.75 percent. With nothing on the economic front, there was little throughout the day to exacerbate the current overall decline from a record 12-year high of $1.9507 hit on December 7th. As a result of the weekend, investors will be anticipating a couple of key reports next week as recent releases on manufacturing, production and housing prices have disappointed, suggesting that tightening policies continue to take effect, eliminating the risk of future interest rate hikes. Currently short sterling contracts are not favoring a 25 basis point increase until the second half of 2005. Ultimately, investors will be looking for confirmation in next week’s economic data for signs of continued expansion to justify current forecasts for a 3.2% growth in Europe's second largest economy.
To the relief of the Japanese government, the dollar rallied to a high of 106.23 against the yen before retracing some of its gains later in the day. The extensive rally that we have seen over the past 3 days has stemmed from the recent widening of the current account surplus and weakness in Japanese growth. The outlook remains equally dismal as a survey of 15 private think tanks released today expect growth to slow to 1.2% in 2005 from 2.1% in 2004. However, the main focus next week for Japan will be the quarterly Tankan survey of business sentiment. For the first time in six quarters, the index is expected to deteriorate. High oil prices, weak global demand and a strong yen should all be applicable factors.
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