eur fundamentals

US Dollar Rally From G7 Commentary Short Lived

Monday, 14 April 2008 21:52:53 GMT  |  Terri Belkas and David Song, DailyFX.com

Comments from the G7 meeting led to a US dollar rally early morning, but the appreciation was short lived as market participants cut bets of an intervention by the central banks. As a result, the US dollar picked up the biggest gains against the New Zealand dollar service activity stalled to a record low, and was followed by the Australian dollar as the pair fell to 0.926. The US dollar also picked up against the low yielding Yen, but posted a minor decline against the Swiss franc as the pair fell to 0.998. Conversely, the US dollar took the biggest plunge against the Canadian dollar as the pair held at 1.018, and was followed by the British Pound as rising inflationary pressures spurred bets that the Bank of England will be less inclined to cut rates. The euro inched higher against the fading dollar as the pair rose to 1.584, with European Central Bank officials confirming that the bank has no plans to trim rates any time in the near future.

The G7 post-meeting comments released on Friday showed volatility concerns in the currency markets, with many officials changing their tone as they agreed to ‘monitor exchange markets closely, and cooperate as appropriate.’ The comments pushed for a huge US dollar rally during early morning session, but fresh economic data illustrated growing downside risks for the US economy as rising food and energy prices continues to fuel inflation. As a result, Advanced Retail sales grew to 0.2 percent from minus 0.4 percent as consumers dished out more cash for food and gas, with rising food costs becoming a global concern as World Bank President Zoellick urged world leaders to act on the issue on Sunday. Recessionary fears also heightened as Business Inventories climbed 0.6 percent, followed by a 1.1 percent decline in business sales.

Increased volatility took hold of the stock markets as they consolidated mid-session gains, with investors turning bearish as Wachovia plans to sell $7B in preferred and common stocks after posting a first quart loss in profits. As a result, the DJIA fell 23.36 points to 12,302.06 points, with Bank of America and Alcoa Inc posting the biggest losses. The broader S&P500 shaved 4.51 points to 1,328.32 points, with 292 stocks falling to a new 52 week low.

US Treasury demands picked up as growth prospects remain bleak, and led investors to move into the safe haven of risk free bonds. As a result, the benchmark 10-Year yield jumped to 3.513 percent from 3.475 percent, while the 2-Year yield surged to 1.762 percent from 1.754 percent.

Looking ahead, we expected US dollar volatility to pick up tomorrow as the Producer Price Index and the Empire Manufacturing index will kick off the morning at 12:30 GMT, and will be followed by the Net Long-Term TIC Flows index at 13:00 GMT. The ABC Consumer Confidence will bring an end to the eventful day at 21:00 GMT, with most market participants expecting the index to hold at 20.

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