The dollar was down on Friday as safe haven trade tailed off and investors bought risk again. U.S. yields started to fall after last Thursday's benign U.S. inflation report with the10-year Treasury yield falling to a one-week low and the dollar falling on its coat tails, however, volatility was low with no new data on the economic front. The greenback fell to $1.2363 against the euro and was down against the yen to ¥90.70.

   Generally positive economic figures out of Italy and Germany helped boost the euro which treaded up against the dollar. German producer prices were up from 0.1% expected to 0.3% and Italian industrial orders were up from 0.8% to 4.7% MoM, although Italian industrial sales dropped slightly MoM to 0.5% whereas 1.5% had been expected. The glow from the success of a Spanish Bond auction on Thursday began to fade as the euro gained more slowly, only edging up against the dollar to $1.2363, and falling to the yen to ¥112.35.

   Figures released on Friday showed that whilst public sector borrowing fell below analyst’s expectation – which was positive for sterling – it was still much higher than the month before. Nevertheless the pound rallied on the data reaching highs of 1.4885. Mortgage approvals were up slightly and money supply slowed, showing deflationary pressures, but then given the recent inflationary outlook the slide may not have been completely unwelcome. The main focus next week will be on the emergency budget published on Tuesday 22nd, which could well dictate the course of the next few weeks. Overall the end of last week was quite robust for sterling, which gained against the dollar to $1.4820 and gained slightly against the euro to £0.8354.

   The yen advanced at the end of the week as equities declined following the release of the BOJ minutes which showed members were still concerned about the unstable financial situation in Europe. Apart from the rate decision which left rates unchanged at 0.1% the BOJ was upbeat about the economy, reflecting the improving data coming out of the last quarter, and this spurred a rally in the Yen. The yen also strengthened as U.S. yields started to fall after a benign U.S. inflation report, with the 10-year Treasury yield falling to a one-week low and almost in sync the dollar weakening against the yen. Long term, there is also a view that the yen will strengthen after the announcement by the Peoples Bank of China that it will un-peg the yuan from the dollar. The yuan is expected to strengthen over time which is good for major exporters to China such as Japan and so should help strengthen the yen. But details of a ¥3Tr loan scheme, which aims to get Japan out of deflation and achieve sustainable growth remind us that the reality is central bank is still having to use QE to bail out the economy and this cannot be a symptom of a particularly healthy economy. The fund will be made available to private banks to lend to companies for making longer term business investments. Starting by the end of August, each participating bank could borrow a maximum of ¥150bn at the current 0.1% rate. The loan scheme will target 18 sectors including healthcare, environment and energy, tourism, science and technology as well as agriculture, forestry, and fisheries. The yen rose to ¥90.70 against the dollar and rose to ¥112.35 against the euro.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst