The dollar continued falling after better than expected earnings from Intel and Alcoa boosted risk appetite and led to a slackening of safe-haven demand. Retail sales fell 0.5% in June, which was more than the 0.3% drop expected. The dollar was actually down on the data even though it shows weakness in the US recovery and would have been expected to make investors more risk averse. The Fed appears to be dovish in outlook and with no rate rise on the horizon, the dollar looks like it may fall some more in the short term. On Tuesday, the dollar fell to 1.2724 against the euro and 1.5175 against the pound.

   The euro gained after positive news of the success of a Greek bond auction but stalled as CPI remained flat and industrial production showed subdued growth with output in May falling short of expectations. Overall the outlook seems rosier for the euro for the time being but the real test will come on the 23rd July when the much awaited banking stress tests will be published. The common currency ended the day at 1.2724 against the dollar and 0.8382 against the pound.

   The pound rose amidst inflation expectations after CPI and RPI figures released showed prices remaining high. Jobs data showed a fall in unemployed by 34,000 to 2.47m and this further pushed up the pound. However the fact that the most dramatic increase was in those working part-time, which jumped by 148,000 to 7.82m (the highest since records began in 1992), means that whilst more are in work they are not likely to be in the sort of high paid full-time employment which would boost growth greatly. Analysts remain skeptical about the future, some even believing high unemployment will last with us for several years as the economy contracts. But overall, the trend for the pound seems to be up as interest rates could rise sooner than thought and the economy remains stable. The pound ended yesterday up against the dollar at 1.5175 and up against the yen at 134.64.

   The yen fell yesterday against most counterparts after positive earnings from the US led investors to embrace risk once again. The yen may begin to show strength soon however as it is still the safe haven currency of choice for many. Most economists believe the Japanese economy is resilient enough to withstand the country’s huge levels of public debt and despite recent political uncertainty it appears all parties in Japan want to cut the deficit so the lack of clear leadership may not affect economic policy as much as feared. The yen may be expected to further strengthen in August as limits are imposed on the amount of leverage are introduced. Many believe this will lead to a closing of over-leveraged positions and increased yen buying. The yen finished down yesterday, reaching 88.73 against the greenback and 112.89 against the euro.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst