The Dollar had a mixed day on Wednesday falling marginally against the Pound and the Euro but rising against the Yen. A strong rally in the equity markets increased risk appetite and reduced Dollar demand but better than expected housing and vehicle sales data strengthened fundamentals and kept the greenback buoyant. Pending home sales were up higher than the expected 20.2%, coming in at 24.6% and vehicle sales were up with domestic vehicle sales up from 8.78 to 9.14 million MoM. This came after many analysts were expecting sharp falls in these sectors after the withdrawal of government incentive schemes. The Dollar ended the day at $1.2248 to the Euro and ¥92.11 Yen to the Dollar.

   The Euro gained slightly against the Dollar as economic and political leaders rallied in its defence. Jose Manuel Borrroso, European Union President, made the comment that the Euro was a “strong and stable currency” and banking chiefs have said that a weaker Euro could benefit a recovery particularly in the peripheral EU economies. Others have pointed to the fact that the Euro has declined from all time highs to an overall median point and a Reuter’s poll of international central banks suggested they would not be reducing their Euro holdings in the wake of the crisis – despite a story that Iran was selling over 50% of its Euro holdings. In Spain news came that four more troubled regional banks or ‘cajas’ had announced they were to merge thus alleviating some of the stress on the ECB’s liquidity provision measures. Euro zone PPI data showed an increase in production costs which were surprisingly inflationary. The Euro closed marginally up against the Dollar at $1.2248 and marginally up against the Pound at £0.8358 to the Euro.

   UK data including money supply and mortgage approvals all continued to show steady incremental growth although consumer credit was down sparking concerns that increasing unemployment and household austerity might be beginning to affect the economy. The Pound fell back from earlier highs to end the day slightly up at $1.4650 to the Pound but was down slightly to £0.8358 to the Euro.

   The Yen fell heavily against the Dollar but held against the Euro after the news of the resignation of out-of –favour Prime Minister Yukio Hatoyama and rumours that the Finance Minister Naota Kan would replace him. Kan favours a weaker Yen for exporters and is the most likely successor to Hatoyama. The bigger picture marks an uptick in political risk for the Yen which fell 1.3% to ¥92.11 to the Dollar and 1.5% to ¥112.70 versus the Euro.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst