Dollar Rallies on Retail Sales, Euro Words

Using harsh words to make people do what you wish them to do doesn’t always work, and if it doesn’t, you could try to nudge in a positive way, saying that it would be nice if they do as you say. This gentler form of persuasion seems to be working right now, coming from Euro Group chairman and Luxembourg Finance Minister Jean-Claude Juncker, coinciding with the change in market sentiment towards the US dollar in the forex markets.

Juncker said that before, “financial markets didn’t correctly understand the message from the G7″ as traders kept shorting the dollar after the latest G7 meeting (at which the statement on currencies was slightly modified), but now, he has a positive impression that “more financial markets have a better understanding” and that he would “encourage them to stay on track”. His positively reinforcing statement is a strong indication that Europe’s finance ministers are pleased with the USD’s recent rebound versus the Euro, and that traders should continue to buy up dollars.

ECB’s Trichet and others have been urging the markets for a long time, to no avail, to stop allowing Euro to bear the brunt of dollar’s weakness, but with the USD’s sentiment looking better for the time being, financial markets might just end up doing what Trichet, Juncker and others are desperately hoping for.

US Retail Sales

Tuesday’s economic data gave a boost to the US dollar. US retail sales fell by 0.2% in April, just as expected, but the drop was mainly because of falling demand for cars. Excluding cars, sales rose 0.5% in April, more than double expected. The report also showed that demand increased in many sectors, a sign that US consumers haven’t stopped shopping and the economy might not be that weak. Even March’s ex-auto sales were revised up to 0.4%, instead of the previously estimated 0.1% increase. Consumer spending is likely to rebound slightly in the third quarter as Americans spend a large portion of the $117 billion in tax-rebate checks being sent out now.

Another report Tuesday showed that US import prices gained 1.8% in April, led by rising fuel and metal costs. Prices excluding petroleum increased 1.1 percent on higher costs for capital goods, industrial supplies and auto parts.

Forex Trading

EUR/USD did break past 1.5530, rising 40 pips to expected resistance around 1.5570, but then bounced 140 pips from that ceiling as a result of heavy shorting interest. Its nearest support is around 1.5400, then 1.5370. USD/CHF has been trading in a narrow range, supported by 1.0400. The British pound fell against the US dollar again Tuesday, dipping to a near 3-month low around 1.9420 after UK retail sales showed the biggest year-on-year drop in three years in April, and the second consecutive monthly decline. Another report today showed that UK inflation rose at its sharpest pace in almost six years in April.

Wednesday:

Australia Westpac consumer confidence 0030 GMT

UK claimant count 0830 GMT

BOE quarterly inflation report 0930 GMT

US MBA mortgage applications 1100 GMT

US CPI 1230 GMT

New Zealand retail sales 2245 GMT

Comments

[SOTOS]

Grace your articles are amazing....keep doing this...great job

[anaconda]

If the Dollar will stabilize or slightly gain in value against the Euro, that would provide relief to the price of oil.

[sedek]

"His positively reinforcing statement is a strong indication that Europe’s finance ministers are pleased with the USD’s recent rebound versus the Euro, and that traders should continue to buy up dollars."

Is the Dollar rebounding against the Euro or is the Euro falling toward the Dollar? Based on commodities, I would say the Euro is falling a little, which explains EU's inflation problems. I see the Dollar stabilizing for now, as Bernanke's rate cuts seem at an end, but the Dollar rise won't come until traders start pricing in an expectation of rate hikes to lower oil costs just in time for the election. I expect 75 bp hike by October, 25 bp at a time, and $3.00 gas when voters go to the polls.

Excellent work, Ms. Cheng. You are a great help. Thank you :)

[LouThomas]

My own best guess is that the ECB and Fed are undertaking some limited support operations for the dollar - not just words. Probably via the Fed/ECB swap lines, which were expanded by an (unspecified?) amount just around the time the dollar started on its present "recovery."

Recall that when this turnaround occurred, the Euro was headed past $1.60 and off to who knows where. It looked like an uncontrolled crash of the world's main reserve currency may have been in progress. Nobody wants such an uncontrolled collapse at this time, even the ECB, which I think does want the dollar to decline, but gradually, so that the Euro can be the new world reserve currency - once it is fully ready to play that role. Yes, there is a lot of complaining about exports from France, etc., but the ECB itself has not heeded those complaints at all. Its concern would seem to be the instability caused by a *precipitous* decline rather than loss of exports due to a continuing but orderly decline. This is based upon what they have said and what they are doing - both words and deeds are consistent with the above analysis.

Anyone who thinks that the Eurozone is prepared to carry the entire bloated U.S. economy on its back, or even would like to, is out of their mind. This is, in my opinion, nothing more than a short-term rap on the knuckles for all of the short-term speculators who were driving the dollar over a cliff. Trichet reached out his "invisible hands" and pulled all of their shorts down, and they ran quickly to cover themselves, driving the dollar up in the process. This is probably similar to what the plunge protection team at the Fed has been doing for U.S. domestic stocks for who knows how long now. Strategic, judo-like interventions that use the triggering of short-covering to amplify modest, strategically-timed interventions.

Short-term, it is painful for the speculators (but they're creating a serious problem for world stability, so it's a good kind of pain). But if you are dug in for the long term in German bunds or other longer-term Euro-denominated instruments, and can afford to wait a month or two, I suspect that the dollar will continue its bumpy ride down the stairs, with periodic shocks to short-term speculators from the ECB/Fed's new cattle prod.

[LouThomas]

Per my comment above, note that the G7 meeting statement says that the G7 is concerned about ``sharp fluctuations in major currencies'' and their ``possible implications for economic and financial stability.'' It does not say that the dollar is too low vs. the Euro. The concern is *sharp* fluctuations, and *instability*.

[MNSL]

Really your article will help intelligent investors to get better decisions.

Yes you are correct. Definitely US Dollar will bounce back and in the same time commodity market will come down. This will help government to control inflation and there will be recovery in the stock market closer to the presidential election and after election we will see further strength of US dollar and stock market.

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