The dollar lost ground on Thursday after data showed US regional factory activity and jobless claims were weaker than expected and haven demand declined as positive news flowed out of Europe. Initial jobless claims unexpectedly rose to 472k, after 450k was forecasted but continuing jobless claims decreased below what was expected to 4500k from 4571k. The dollar may also have been affected by persistent current account balance deficit which grew in the first quarter to -109bn – less than the -122bn forecasted but lower than last quarter’s -100bn. US CPI moderated from 2.2% YoY to 2.0% YoY in May while core CPI was unchanged at 0.9% YoY. The greenback fell to $1.4823 against the pound and $1.2388 against the euro.

   The euro rose on Thursday after a relatively well-received Spanish government bond auction eased some concerns over the ability of the country to service its debt. Spain sold €3.48bn ($4.3bn) of mostly 10-year but also some 30-year government bonds. The euro also benefited from renewed confidence in its banking system after a consensus appeared to be emerging amongst EU policymakers to disclose the results of stress tests on the European banking system. There is fear, however, that the brittle recovery could be susceptible to shocks and in the coming weeks there are a huge number of potential triggers. In particular over the next six weeks, European sovereigns and banks will be raising new debt to pay back existing bondholders at an abnormally heavy rate. A grim run of failed or lackluster issues would almost certainly deal a heavy blow to investors' confidence - a risk to the region's bond markets as a whole. The euro closed at $1.2388 against the dollar and was up slightly against the Yen at ¥112.73.

   The pound rose on Thursday as UK retail sales figures came out positive reassuring investors that the UK’s recovery was on track. British retail figures in May jumped to 0.5% MoM from -0.1% last month and higher than the expected 0.1%. Meanwhile the CBI industrial trends survey showed that manufacturer’s orders slid during June with only 19% of firms reporting an increase in orders and 42% reporting a decrease. Whilst this figure was disappointing it had not reversed the recent positive trend according to analysts. Sterling closed up at $1.4823 against the dollar and ¥134.88 against the Yen.

   The yen weakened on Thursday as safe haven demand fell away on positive news from Europe. Japanese economic news was mildly positive, showing that business conditions in Japan remain buoyant. The Japanese leading index which is a composite of the 12 most important indices in Japan and seen as a predictor of future economic developments was unchanged and the coincident index which is a broadbased economic index measuring everything from income to industrial production to investment showed a very slight drop from 101.6 to 101.3 but given any figure over 50 is good this was still a benign reading. BOJ May policy meeting minutes saw signs of emerging self-sustaining recovery and there were even suggestions of higher inflation expectations, although as one analysts put it: this was surely “jawboning at present considering the bank just introduced a new lending facility.” The yen closed down against the euro at ¥112.73 but was up against the dollar at ¥91.00.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst