The dollar fell on Wednesday as equities surged and risk appetite returned. On the economic data front, MBA mortgage applications for July were down from 8.8% to 6.7% the previous month. This seems to continue the trend for poor economic data which has recently beset the US economy and brought into the question the health of the recovery. However equities rallied strongly and demand fell for the risk aversion dollar trade. The greenback closed the session down against the euro at $1.2637 and down against the pound to $1.5187.

   The euro traded mixed after economic data from Germany showed the pace of the recovery there had slowed. German factory orders were down from 3.2% to -0.5% MoM. However, this negative data was offset by positive news from the money markets. The recent bond auctions of euro zone government debt went better than expected with Germany raising 4bn euros in 10-year notes and Spain and Portugal also raising substantial amounts with reasonable yields. This has re-affirmed confidence that the euro zone can successfully borrow money without the need for ECB intervention. The euro closed up against the yen at ¥110.82 and down against the pound at £0.8319.

   The pound rose against most of its counterparts on Wednesday, however, the rise was not very substantial and the current rally seems to be running out of steam. Investors, who have supported sterling recently because of the positive steps taken by the government to reduce the deficit and hawkish BOE comments are now looking for more tangible, fundamental signs of economic improvement. They will be awaiting the BOE interest rate decision today eagerly in order to access the likelihood of an increase in interest rates in the foreseeable future. A rate change is unlikely however given the recent dovish BOE comments stressing a more flexible monetary policy and the slow consumer data of recent weeks. Sterling ended Wednesday’s session up against the dollar at $1.5187 and up against the yen at ¥133.18.

   The yen lost value against most of its counterparts as safe haven demand tailed off and investors embraced riskier assets. Economic data from Japan was also overall poor with the trade balance showing a narrowing as demand for imports increased due to the strong yen. Machine orders and money stock were also down and bank lending was stagnant. The deflationary trend remains firmly intact and now Japanese policy makers also have the headache of declining exports. Given how low interest rates are already it should be interesting to see how the Japanese authorities solve this particular monetary problem. The yen ended the session down against the dollar at ¥87.70 and down against the euro at ¥110.82.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst