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Wednesday June 1, 2005 - 21:27:16 GMT

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Forex: Euro Takes The Reins, Dollar Shakes Off Weaker Data and Higher Oil Prices

DailyFX Fundamentals 06-01-05

By Kathy Lien, Chief Strategist of

· Euro Takes The Reins, Dollar Shakes Off Weaker Data and Higher Oil Prices
· Fresh 8 Month Lows In Euro As Dutch Vote “No” To EU Constitution
· Pound Slides On More Signs Of Housing Sector Weakness

US Dollar
Today was another great day for the US dollar even in spite of mixed economic releases. Over the past few days, we have watched the euro snatch the reins from the dollar in leading the EURUSD pair based upon the region’s political developments. With not much market moving economic data out of the US to count on over the next 24 hours, the dollar could continue to resign itself to news from the Eurozone. We will have to wait for Friday’s non-farm payrolls report before the dollar can get any chance at regaining its control over the euro. Yet before we review the economic releases that came out today, we want to make note of the comments made by Dallas Fed President Fisher earlier this morning. Fisher, who happens to be a voter on the FOMC this year, said that we are in the “eighth inning of the tightening cycle.” This is actually very important since it tells us that to at least one member of the monetary policy committee, we are near the end of the Fed’s aggressive campaign of rate hikes. Therefore should US data continue to be mixed and this Friday’s NFP report fall short of expectations, we could be right around the corner from the last rate hike and the end to the primary catalyst for dollar strength since the beginning of the year. Also, do not forget to keep an eye on oil prices. Crude jumped over $2.50 today to $54.60, which is the highest level of crude prices in 5 weeks. If you recall, Greenspan told us less than 2 weeks ago that energy prices remain “central” to the economy’s health. If oil prices continue on its recent uptrend, the mixed data that we have been seeing lately may start tilting more heavily in one direction. Now, moving over to today’s data, the national ISM manufacturing index fell for the sixth consecutive month to 51.4 from 53.3. Although this is more than the market’s consensus forecast, it should not catch any of our readers by surprise since there were even sharper shortfalls in the regional surveys. The national index is now but an arm’s length away from the key 50 threshold between contractionary and expansionary conditions. Construction spending on the other hand hit another record high, even though the rise fell short of expectations.

The euro fell to fresh 8 month lows against the dollar as the Dutch cast their ballots and vote with a 62 percent majority to reject the EU Constitution. The latest round of euro bashing began when rumors circulated in the market about how key Eurozone officials may be discussing the possibility of a breakdown in the European Monetary Union. This was later denied, but this has certainly hit on a major fear of both traders and investors, which is whether the breakdown of the European Constitution means the death of the euro. We still stand staunchly behind our view that too much money has been invested in the Euro project for the big three to be willing to readily step away from a common currency and go back to their individual currencies. Not only would this be pure embarrassment for the already battered governments, but according to opinion polls, this is not necessarily what the public wants as well. From here on, the governments will have to listen to the grievances of their citizens and take the debates back to boardroom as they hole themselves up and try to hammer out another version of the Constitution. EU leaders are set to meet in Brussels on June 16 and 17. The future of the EU is sure to dominate discussions at the meeting.

British Pound
The British pound slipped to 7 month lows thanks to another round of weak economic data. Signs of a further slowdown in the housing market were apparent following the release of April consumer credit data. According to the report, consumer credit increased only GBP1.3 billion compared to expectations for a 1.6 billion rise. This is the weakest increase since December of 2003 and signals that the one remaining member voting for a rate hike in the Bank of England’s monetary policy committee will probably be switching sides. Aside from the consumer credit data, we also had weak manufacturing sector data. PMI for the month of May fell to 47.3 from 49.1, which is the lowest reading since March 2003. Data is really turning sour in the UK, which gives any remaining carry traders in the GBPUSD a better reason to exit their carry trades.

Japanese Yen
The dollar ended higher against the Japanese yen for the sixth consecutive trading session as better than expected economic data lent to a temporary strengthening in the currency before further weakening ensued. Released in the late New York session yesterday, economists saw earnings rise for the fourth time in three months as lower estimates were once again trumped. Expected to decline 0.7 percent, overtime earnings on an annualized basis rose 1.6 percent in the first quarter. With an additional report on higher labor cash earnings, rising 0.6 percent higher, suggestions that a brighter future in employment and subsequent output sparked bids on Japanese positions, albeit temporarily. Additionally contributing to the bounce were strong May vehicle sales. Jumping 7 percent, the climb indicates that demand remains strong and may be suggestive of a definitive turnaround in the land of the rising sun. However, a confirmed belief may be a little hasty at this moment as traders search for a definitive piece of evidence in bolstering the weak sentiment.


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