The Dollar rose against most currencies on Thursday on hawkish comments by Fed officials and solid economic data. There were rumours Fed officials may increase the Fed fund rate to 1% soon as the economy continues to recover despite persistently high unemployment. The ISM non-manufacturing index came out higher than expected but still solidly above the 50 level and factory order’s rose strongly by 1.2% in April. The ADP report showed an increase of 55k in private company employment in May but initial jobless claims remained high at 453k and continuing claims rose 31k to 4.67million. All eyes will now be on the all important NFP results today which analysts are expecting will show a sharp increase. The Dollar rose against the Euro to $1.2163 and reached $1.4615 against the Pound.

   Euro was the weakest currency weighed down by banking problems as it came to light that banks had deposited 320billion Euros overnight on Wednesday night with the ECB in their deposit facilities, the highest amount since the Lehman’s disaster. This shows that banks are too afraid to lend to each other which would be devastating and could lead to another financial crisis. The rate that banks lend to each other jumped to a new high of 0.706% the highest level it has reached in 2010. Some smaller banks cannot borrow any money at all. Euro zone retail sales dropped sharply by 1.2% in May and 1.5% YoY showing consumers might be tightening their belts. The Euro fell 0.7 per cent to $1.2163 to the Dollar and was flat against the generally weaker Pound at £0.8322.

   Sterling had a mixed day overall closing up against the Yen at Y135.32 and down against the Dollar at $1.4615 as housing data remained positive but services PMI showed a slowing in the rate of business growth. UK services PMI rose less than expected to 55.4 showing how fragile the recovery still is as the rate of expansion slowed in May. Data from the Nationwide House Price survey showed an increase of 0.5% MoM and 9.8% YoY although this has been explained as a lack of supply rather than demand. Prime Minister David Cameron also announced he would press ahead with a bank tax even if the G20 nations didn’t jump onboard raising concern this might lead to a flight of capital. The Pound was down 0.3 per cent to $1.4615 against the Dollar and rose 0.2 per cent to Y135.32 against the Yen.

   The Yen had a mixed day as markets digested the political implications of the Prime Minister’s resignation. Since Hatoyama’s demise Naota Kan is seen by many as the frontrunner to take over. Mr Kan is seen as endorsing an interventionist currency policy to keep the value of the Yen down. The Yen fell 0.5 per cent versus the Dollar to Y92.60, but added 0.2 per cent against the Euro to Y112.63.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst