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The dollar – a smooth operator
The cooling down of the world largest economy and tame inflation reports ratcheted up expectations that the Federal Reserve was done with its interest rate hike campaign. Prolong seesaw sessions provided another fillip for wary traders to ditchthe greenback at the expense of other currencies.
The US dollar initially tumbled after the US government reported that core consumer price index, excluding food and energy prices, rose 0.2 percent in July, below the median forecast of 0.3 percent.
Overall consumer price inflation for July year-to-date slipped to 4.1 percent from 4.3 percent last month. Another report indicated that the pace of US home constructions fell more than forecast and industrial production undershot estimation for thesame month.
However, the US dollar recovered slightly as market positioning was already tilting against the US currency and risk of a dollar rebound was mounting. According to analysts, lethargic summer markets and persistent lack of liquidity might cause a dollar spike.
A fresh breeze blew over the greenback after the Philadelphia Federal Reserve Bank stated that it’s index of business conditions in the US Mid-Atlantic region shot up in August to its highest level for over a year.
The dollar recovered some ground reversing a two-day decline. The focus on economic data returned back onto the table, as analysts believed that the Philly Fed report was likely to be limited. In fact, the prices paid component indicated an alleviation of price pressures to such an extent that the dollar upside potential would be capped and would do nothing to alter the market dovish sentiment for the Fed. The US dollar traded at MUR 32.552 yesterday, compared to MUR 32.250 last week.
Continued upside trend for the pound</B>
Sterling had been rowing back from the wake of the surprise interest rate hike as dovish Bank of England minutes gave clues that it would be in no rush to repeat this month surprise again. The BoE showed a 6-1 vote favoring the surprise rate hike of 25 basis points early this month.
However, the monetary policy committee noted that the hike could be reversed if necessary. The pound continued on the upside despite the inconsistency of the BoE declaration and the bullish quarterly inflation bulletin.
In addition, David Blanchflower, a new MPC member, stated that he would like to see the UK’s interest rate to be on hold due to concern over the labor market. The British labor market statistics showed that average earning in the UK climbed fasterin August.
Some more economic data were released but did not dent the pound. British net mortgage lending, according to the British Banker’s Association, matched May’s two-year high in July.
Official data, on the other hand, pointed out that the public sector posted net cash repayment of nearly 10.5 billion pound in July, with approximately 2 billion pounds higher than expected.
Towards the end of the week, Sterling managed to hold its head up against a weaker dollar, when news hit the market that Saudi Arabia might have signed an agreement with Britain for the purchase of 72 Eurofighter Typhoon aircraft in a deal analysts believed could be worth over6 billion pounds. The Sterling was traded at MUR 62.09 as against MUR 61.54 last week.
The Japanese yen basically fell out of favor as the Bank of Japan emphasized that it would not be pushed to raising interest rates in Japan. In mid-week, the yen got some support as China raised interest rates by 27 basis points in an attempt to calm a boom in credit and investment.
Traders speculated that the second rate rise in the year could be preceded by other measures to curb China’s overheating economy, including a freer yuan. The yen often was traded as a surrogate for the yuan because it was considered as Asia’s most liquid currency and that Japan enjoyed close ties with China.
However, analysts still believe that the yen gains would be just fleeting. The yen was sold at MUR 28.31 as compared to MUR 28.07 last week.
<B>Major data/events this week :</B>
■ <B>Wednesday 23 Aug : </B>
US mortgage
■ <B>Thursday 24 Aug :</B>
US durable goods, Durable
■ <B>Friday 25 Aug : </B>
GBGDP
■ <B>Tuesday 29 Aug :</B>
US Redbook
<B>Vassan Caleemootoo
HSBC Mauritius Treasury and Capital Markets</B>
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