The Dollar rose further yesterday after positive economic news showed a rise in durable goods orders, an increase in MBA mortgage applications and a sharp rise in new home sales which increased by 504k versus the 425k expected. The announcement by the OECD that its outlook for the US was for growth of 3.2% in the coming year also helped Dollar confidence. Some economists however see the threat of grey skies longer term as they question how the US will be able to sustain a recovery if there is a severe recession in Europe. A weaker Euro and European austerity measures may hit the US economy with the double whammy of a shrinking market for its exports and an unfavourable exchange rate – and the same goes for China. The Dollar finally closed up against the Euro at 1.2176 and against the Yen at 89.90.

   The Euro declined on news that China was reviewing its Euro bond purchases because of gaping deficits in EU member countries. China holds 630 billion of Euro zone debt acquired to diversify its mainly Dollar denominated holdings. The announcement further highlighted the risks associated with European sovereign debt. The Euro also fell after disappointing economic data showed French consumer spending had fallen more than expected and German consumer confidence was also down. A Bund sale of 5 year debt in Germany failed for the first time since 2008 because of a mixture of unattractively low yields and a loss of safe haven appeal. The Euro closed at 1.2176 to the Dollar and 109.46 against the Yen.

   The Pound fell along with the Euro after data showed a drop in mortgage approvals and concerns increased that the UK could be badly affected in the event of a European banking crisis. GBP BBA loans for house purchase were expected to be 37000 but the data came in significantly lower at 35729. Given the UK’s reliance on trade with Europe which accounts for 50% of exports and its large banking sector the threat of another crisis raised by last week’s bailout of Spanish bank Cajasur still lingers with interbank lending rates rising significantly. There are also concerns over the strength of the coalition government as conservative back benchers began a revolt against a proposed increase in capital gains tax made as a concession during coalition negations. Sterling closed at 1.4386 against the Dollar and 129.32 against the Yen.

   The Yen gained as the Euro came under selling pressure again and market participants sought safer investments. It rose against most currencies closing at 89.90 against the Dollar and 109.46 against the Pound. Economic data was stable and met analyst’s estimates with the Japanese trade balance remaining stable at 700billion.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst