The dollar was down against most counterparts on Friday following disappointing GDP figures and concern that austerity measures in Europe may affect the global recovery. The revisions to real gross domestic product released Friday showed the US economy grew at an annual rate of 2.7% in the first quarter, down from the 3% reported a month ago and the 3.2% rate reported in April. Leading the slowdown was the consumer sector. Growth there was down to 3% from 3.5% estimated in May. Consumer spending accounts for about 70% of US GDP and the slow job’s market is thought to be a major contributing factor to the weak figures. Whilst companies are making profits they are using most of the money in defensive measures to repair their balance sheets rather then in employment and growth strategies. The fashion for austerity is all-encompassing. In addition the relationship between bad economic news and the dollar appears to have changed. The greenback used to go up after a poor economic forecast as investors fled to the safety of treasury bonds but now perhaps due to record low yields on these bonds, not seen since the Lehman crisis they have lost their shine, due in part to the last dovish FOMC statement. It now appears that bad news for the economy is not good news for the dollar any more. The dollar fell to $1.2369 against the euro and $1.5058 against the pound.

   The euro traded mixed on Friday following solid economic data although there was a general aversion to risk which lead to losses amidst the gains. There was little change on the economic data front with French GDP and Italian hourly earnings staying unchanged; and German import prices rising slightly. All in all a rather slow day on the markets as traders awaited the G20 conference in Toronto. At the conference over the weekend there was something of an ‘Atlantic rift’ between Washington and the rest of Europe over how to keep the recovery on track. The Europeans are focused on austerity to cut their budget deficits whilst the US still wants to spend its way out of recession. However, the US has a considerably lower debt to GDP ratio compared to many EU states so what works for them might not for other countries. News from the G20 suggested the almighty bust-up which many feared might happen didn’t and the leaders came away agreeing to halve deficits by 2013 with the option to use whichever other methods were appropriate to their own country’s individual requirements. The reaction by the markets this morning has been muted. On Friday, the euro closed up against the dollar at $1.2369 but slightly down against the yen at ¥110.39.

   Sterling shone as markets continued to give the thumbs up to the recent emergency budget and slightly hawkish BOE minutes gave indications a rate hike might not be as far off as thought. Tuesday is the next big news day for the UK when mortgage approvals and consumer credit figures are published. The pound closed Friday’s session up above 1.50 against the dollar at $1.5058 and up against the euro at £0.8213.

   The yen traded mixed as safe haven demand increased but poorer than expected retail sales figures showed the largest drop in 5 years. Japanese retail trade figures for May were down from 0.5% last month to -2.0% in May. The figures suggested the threat of deflation again after recent BOE statements had been much less deflationary in tone. The next important economic news release to watch is the jobless rate out today. The yen closed up against the dollar to ¥89.23 but was down against sterling to ¥134.36.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst