US Dollar falls on Snow's comments

US Dollar

Dollar strength was limited yesterday with most of the majors making some headway from Friday’s pullback. With no economic data, the fluctuations were restrained to the current consolidation as comments from US Treasury Secretary Snow helped spark the day’s dollar weakness. Speaking in Sharm el Sheik, Egypt at an interview yesterday, Secretary Snow noted that the cash windfall from Middle Eastern oil producers is likely to lead to improved school conditions and roads in the region and not further investments in US assets.

With crude oil prices climbing 40% higher on the year, oil producers have increased their holdings of US treasuries, notes and bonds. The amount has grown phenomenally with members of the Organization of Petroleum Exporting Countries increasing their holdings by 158 percent in the past three years. Although the Treasury Secretary went on to note that global foreign interest remains underpinned and that the market is so “huge that the sums” would “pale compared to the size of that capital market” traders took to paring back dollar positions.

Ultimately, with interest thinned concerns are surfacing that the twin deficits may further weigh on the overall currency market. Looking ahead, with no releases on the session, traders will be privy to the still nascent Richmond index in dictating tomorrow’s direction. Should the report print higher than the expected 15 reading, speculation could resurface of further rate hike considerations.

Euro

Euro data was promising yesterday and continued the rather positive line seen last week. For the month, Euro zone trade balance showed a seasonally adjusted March surplus of 300 million euros. Expectations were for a deficit of 2.5 million euros as the consensus looked for a slow down in exports on an apparent appreciation.

However, the better than expected result boosted euro fortunes on the session when coupled with comments made on Sunday by the European Central Bank’s Liikanan. The policy maker was quoted in a German newspaper as stating that the current European economic scene remains “broad based”. Traders coupled the positive statements with hawkish rhetoric from council member Liebscher and a bullish deputy finance Mirow that repeated the government’s stance on a resilient appreciation in the underlying currency.

Ultimately, further hawkish speculation could mount on the weak given the upcoming sentiment results on Wednesday. However, with the most recent ZEW lending to some bearish notions, expectations run slightly higher of a similar IFO.

British Pound

Sterling trading was kept to a relative standstill aside from the usual euro pattern bidding. With no economic data, the underlying spot fluctuations look to follow euro bidders in the near term until Wednesday’s batch of surveys. Most importantly will be the CBI industrial trends survey. Expected to continue the recent improvement, the survey results would further the current optimism as the report stands suggestive of underlying productive expansion in the United Kingdom. This would be coupled with the recent underpinning in the housing sector along with a seeming rebound in consumer sentiment and spending.

Subsequently, a positive report would also spur further speculation on the rumored two rate hikes that the market may be expecting before yearend. With inflation tepid, positive growth from all sectors looks to feed future price increases and ultimately convince Mervyn King to raise interest rates in remaining preemptive of such forces. Considered pound bullish, the consensus may very well now expect a retest of the $1.9000 figure and a possible touch of $2, not experienced since 1992.

Japanese Yen

Dour convenience store sales boosted yen weakness in the overnight only to fade and see the spot price rebound lower in favor of the Japanese denomination. For the month of April, convenience store sales declined 4.9 percent and sent some shockwaves in the market that the economy may not be ready for an end to zero interest rate policy. However, what is notable was the fact that a decline in traffic of 0.8 percent lent to the overall weakness as consumer spending actually improved over the span of the month, possibly skewing the report.

Nonetheless, the yen rebounded in midday as expectations run deep of an improvement in the Tertiary industry index. A measure of the spending in the services industry, which constitute 60 percent of the overall economy, the report may lend to further bullish bias in favor of the near term rate hike. Declining 1.5 percent in the month of February, expectations are for an increase to a negative 0.2 percent reading.

Kathy Lien is the Chief Currency Strategist at Forex Capital Markets. Kathy is responsible for providing research and analysis for DailyFX, including technical and fundamental research reports, market commentaries and trading strategies. A seasoned FX analyst and trader, prior to joining FXCM, Kathy was an Associate at JPMorgan Chase where she worked in Cross Markets and Foreign Exchange Trading.