The dollar rose slightly despite a lack of trading flow and liquidity because of the Independence Day holiday, closing up at 1.2537 against the euro and 87.76 against the yen. The little news there was, was generally negative with Dallas Federal Reserve President Richard Fisher being reported as saying in an interview with a Japanese newspaper that he thought the US economy would slow in the latter half of this year. Investors are also worried that the risk of default for US local governments is growing. The yield attached to some forms of municipal bonds has risen relative to US Treasury bonds because of fears that cash-strapped local governments will struggle to repay these loans. However, despite the bad news and recovery hopes dwindling nothing except the holiday could explain the lack of direction in the markets yesterday.

   The euro fell despite good economic news after hitting key resistance levels in the 1.26s. It closed the session down slightly against the dollar at 1.2537 and down against the yen at 110.03. A composite indicator of euro zone retail sales defied expectations by showing an increased reading from -0.9% to 0.2% MoM and -0.5% to 0.3% YoY. However this didn’t give an anticipated boost to the value of the common currency perhaps because of thin holiday trading in the US and the overbought levels reached in the recent rally which has also hit key resistance highs. There was further hopeful news that investors are starting to repurchase peripheral euro zone debt including Spanish, Greek and Portuguese bonds, in particular Spanish bonds, whose markets have risen by 3 per cent since the end of last month. All in all the outlook in the short term is much rosier for Europe but the real question is whether these improvements are sustainable or temporary and so far there have been no signs of a real turnaround yet.

   The pound was mainly down as investors began to fear the planned austerity cuts could grind an already weak economy to a halt. Sterling began to pare the gains of last week after data released yesterday showed a slight fall in the purchasing manager’s index for services from 55.4 to 54.4. This sparked fears that the economy was faltering already even before the majority of the spending cuts are implemented and that the private sector which the government is hoping will make up the short fall left after job cuts in the public sector make thousands more redundant. A small statistic, however, is not a trend and recently UK economic data has been reasonably robust so it remains to be seen whether this is the start of another recession or just a blip. Sterling closed down against the dollar at 1.5133 but up against the euro to 0.8283.

   The yen traded mixed due to a lack of safe haven demand and poor liquidity because of the holiday in the US. Despite a fall in equities and riskier assets the yen failed to capitalise. This may be because it was a generally muted day for the markets with the US on holiday. The yen closed down against the dollar at 87.76 and up against the pound at 132.81.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst