Monday May 10, 2004 - 21:46:38 GMT
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Dollar Consolidates Friday's NFP Gains
· USDJPY trades above 114 for first time since last September
· Berkshire Hathaway reports $600 million loss on short dollar positions
· UK retail sales growth accelerates in April
After Friday’s blowout nonfarm payrolls number, the dollar consolidated its gains against the euro, trading in a tight 30-pip range Monday. In the Euro area, Italy received the support of France and Spain in its bid to avoid a warning on exceeding SGP-mandated deficit levels. Following transgressions by France and Germany, this latest move threatens to undermine the European Commission’s authority in monitoring and implementing area-wide budgetary rules, and could prove a medium-term EUR negative. With nothing on the US data front and few official comments, global equity market losses early led to a bout of profit taking, causing EURUSD to test the 1.1870 level before coming off slightly. Midday the dollar received a bit of a boost as the market reacted to heavy losses--$600 million dollars--taken by Berkshire Hathaway this year on its $18 billion dollar short dollar bet. This week FX players look to US inflation data to gauge the pace and timing of Fed rate hikes.
USDCHF enjoyed a bit of a safe-haven bid as geopolitical concerns in Iraq and the global equity market pullback spurred demand for the low-yielding Swiss franc. CHF was little affected by news that UBS paid a $100 million fine for improper transactions in its Federal Reserve account. USDCHF lost the 1.30 handle during the New York session, falling off from above the 1.3050 level to close just below the figure. Such dollar weakness may be short-lived given diverging interest rate expectations. The July Fed Futures contract, a reasonable proxy of expectations for the Fed’s late June meeting, is currently pricing in a 92% probability of a 25 basis point hike. Moreover, the October contract implies nearly 75 basis points worth of tightening before the November presidential election. In contrast, recent comments from the SNB’s Roth and Hildebrand imply that the Bank will remain on hold next month.
Cable retraced some of its sharp Friday sell-off, rising off a morning low in New York around 1.7710 to close at the 1.7770 level. Sterling had been weighed down somewhat as expectations of rising US rates led to a narrowing of the differential between the UK and US, with 2-year spreads recording their smallest level in ten months. Adding to GBP pressures, US-based Home Depot nixed the notion of acquiring Kingfisher in the UK, obviating its need to buy sterling. Mixed data today out of the UK as house price growth slowed in March—prices increased by 7.8% year over year in March, down from 9.8% in February and below consensus estimates of 10.2%. However, led by promotional discounts, UK retail sales growth accelerated in April, rising 1.9% year over year versus 1.3% in March. Data-wise the market will be looking to Wednesday’s Bank of England Inflation Report for signs of the MPC’s future tightening intentions.
USDJPY drifted higher during the US session, briefly breaking above the 114 level for the first time since last September before retreating to around 113.70. An e-mailed bomb threat to the US embassy in Tokyo, widespread sell-offs in Asian equity markets, increasing US rate hike expectations, and continued evidence of Chinese government efforts to cool off the economy all helped to pressure the yen. With the upside labor market surprise in the US, rising short-term rates jeopardize Asian exporter profits—coupled with foreseen reduced demand from China, the Japanese export engine appears doubly threatened. Currently USDJPY trades in the gap caused after the September G7 communique in Dubai calling for more flexibility in exchange rates. Sustained price action above 114 opens the door to a potential move toward the 117 level.
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