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Friday September 10, 2004 - 20:46:37 GMT -

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Dollar Tanks As Producer Price Inflation Falls

DailyFX Forex Fundamentals 09-10-04

By Kathy Lien, Chief Strategist of

· Dollar Tanks As Producer Price Inflation Falls
· Swiss GDP Growth Slows In Second Quarter
· Japanese GDP Growth Revised Downward


Another great day for the euro spurred by shockingly disappointing US economic data. The intraday price action is equally interesting. Leading into the 8:30 EST data, the market had its eyes peeled on the trade balance, looking for an improvement after the deficit widened to a record high in June. To their relief, the trade balance narrowed to $50.1billion and immediately, traders sold euros and bought dollars. However there was a retracement just as quickly as the sell off occurred as the market turned its eyes to the negative producer price index. Both the headline number and core PPI fell last month, against expectations for an increase in producer prices. The PPI data backs up Greenspan’s view that inflation is falling and supports the call for more gradual tightening. Although a rate hike in September is a near certainty, a November hike is now much less clear. Meanwhile Italian GDP was confirmed at 0.3%, while the OECD leading indicator was unchanged at a downwardly revised 105.8.


Economic growth in Switzerland slowed unexpectedly in the second quarter from an upwardly revised 0.5% to 0.4%. Exports took a plunge, which is significant given the country’s dependency on exports to spur the recovery. This highlights the close dependency of export driven countries such as Switzerland on the sustainability of foreign demand. A similar slowdown in Japan was seen in the second quarter. Although this is slightly worrying, the world’s eighth largest economy is still improving gradually. The latest GDP report makes it more difficult to judge whether the Swiss National Bank will still raise rates at their quarterly monetary policy meeting next week.


Today is the third consecutive day of strength in the pound despite the rather disappointing data we received from the UK this week. To recap, industrial production was negative in the month of July, retail sales declined, while the trade balance widened. We also learned that the UK became a net oil importer for the first time in nearly 13 years. The Bank of England also left rates unchanged at 4.75%, putting the end of their tightening cycle in sight. However, the pound has been battered for three weeks before that and found relief this week in dovish comments from Greenspan and disappointing US economic data. In the week ahead, it will be more difficult for the pound to hide behind the guises of the dollar. There is a tremendous amount of UK economic data slated for release in the week ahead including producer prices and consumer prices, more house price data, unemployment and retail sales. Expected improvements on most releases should give some leverage to the pound, but with a tremendous amount of resistance above and the central bank’s lack of urgency to move rates, the currency’s relative higher yield should be of falling importance.


Japanese economic data caused quite a stir in the yen during Asian and European trading as the government revised down their second quarter GDP figures. After the robust capital spending report released earlier this week, the market had excitedly scratched out their forecasts for modest growth and predicted GDP to rise to 3.4% from the previous release of 1.7%. To the disbelief of many, instead of an upward revision, there was a downward revision to growth spurred by a decline in inventories. However, the government does believe that this is an immediate cause for concern as the overall economic recovery is still underway. For the time being, we side with the Japanese government. The second quarter was weak, led primarily by the fall in oil prices, weaker consumption in the US and slower Chinese growth. As these uncertainties become resolved in the third and fourth quarter, growth should also pickup. Japanese consumer confidence improved in the month of August and is in line with our belief that the third quarter will be stronger than the second quarter.


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AA 08:30 GB- Retail Sales
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