Dollar safe haven demand fell on Wednesday following upbeat comments by Fed Chairman Ben Bernanke that the US economic recovery was on track despite European debt problems. The Fed’s beige book report also painted a slightly rosier picture for the economy and US wholesale figures were positive with inventories up by 0.4% and wholesale sales posting a 0.7% gain in April which was higher the 0.5% expected. An unconfirmed report that Chinese exports had increased 50% YoY added to the general note of optimism about the global economic recovery and helped push down demand further. The Greenback slid 0.81% against the Pound to hit $1.4588 and ended the session at F1.1433 against the Swiss Franc, and ¥91.30 against the Japanese Yen.

   The Euro stabilized on Wednesday as investor’s expressed modest optimism about the pace of the global recovery despite lingering concerns over the European sovereign debt crisis. The combined effect of Fed Chairman Ben Bernanke’s comments that the US economy was back on track and an unconfirmed report that Chinese exports had increased substantially were both contributing factors in the Euro’s recovery. ECB President Jean-Claude Trichet’s speech on European unity and integrity also helped ease investor fears. The cost of insuring sovereign debt issued by European countries improved somewhat yesterday with most countries CDSs falling including Germany, Italy and Ireland’s. GDP figures issued by Portugal and Greece showed Portugal’s GDP was up 1.1% whilst Greece’s which continues to be the black sheep of the Euro zone showed a decrease of the same amount. The Euro closed up against the Dollar at 1.1978 but down against Sterling at £0.8244.

   The Pound rose initially, reaching highs above 1.46 during the early part of Wednesday’s session boosted by risk appetite as global economic confidence returned on the back of positive news in the US and China. However, the gains were short lived as stocks started to fall latter in the day, amidst fresh European debt fears, and negative UK economic data which showed deflation in the retail sector, as consumer’s tightened their belts, and a widening gap in the trade deficit. Sterling ended the session closing at £0.8244 to the Euro and slightly up at ¥132.60 to the Yen.

   The Yen fell against the Dollar initially as investors ditched the Greenback after disappointment at Prime Minister Naota Kan lack of follow through about his preference for a weaker Yen. Expectations were that he would reiterate his stance in favour of Yen 95 as the ideal Dollar rate. The Yen also saw early losses against the Euro as the global economic outlook improved and investors embraced risk once more. Positive comments from the US Fed Chairman and unconfirmed reports of positive export data from China all contributed to a gain in optimism and risk appetite. On the political front there was news of the appointment of the new Finance Minister Yoshihiko Noda, who is know for his preference for fiscal discipline and he is expected to try and keep a handle on Japan’s spiralling debt situation, when he produces an important fiscal consolidation report at the end of the month. The Yen closed up slightly against the Dollar at ¥91.30 and down slightly against the Pound at ¥132.60.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst