Dollar Crumbles During a Volatile Week
The week began with a market swoon after S&P announced that it was placing the US on negative watch. Standard & Poors Ratings Services Inc. cut its outlook on the U.S. to negative, increasing the likelihood of a potential downgrade from its triple-A rating, as the path from large budget deficits and rising government debt remains unclear. S&P stated that a downgrade is still unlikely, somewhere in the 1 to 3 range.
The move comes amid continued hand-wringing over the balance sheet of the worlds largest economy and disagreement among politicians on how to address fiscal woes as economic growth remains sluggish. S&P said Monday it sees material risk that policymakers might not agree on how to address budgetary challenges by 2013, which would render the U.S. fiscal profile weaker than that of other triple-A-rated countries.
Euro zone PMIs were better than expected, with the composite exceeding even the most optimistic forecaster’s estimates. The service PMI fell slightly but this print was still better than expected, while manufacturing nudged higher to 57.8 from 57.6 and in turn the key driver of the overall momentum in the composite. Taken together, the strong print showed continued improvement in the business sentiment, despite the mixed sectored performance and the potential demand destruction from higher oil prices. PMIs at these levels remain consistent with GDP growth between 0.6% -0.9%, suggesting that while market sentiment was dented by the quake in Japan and the ongoing debt crisis (reflected in the ZEW), real data are holding up much better, which indeed supports the hawks at the ECB.
German’s April Ifo business sentiment came in a tad short of expectations, reflecting the current state of global affairs and the modest degrees of cautiousness surrounding recent events. Despite this slowdown in current activity, the German-US two year spread widened to a new record high of nearly 117 basis points which has been driving the Euro higher in recent months.
Sterling is the strongest performer on week versus the dollar driven in part by the magnitude of the upside surprise in retail sales, accelerated by the return of risk appetite. Retail Sales jumped .2% month over month compared to the -.5% expected. Although the probability of a May rate hike has fallen considerably (10%), the expected rate hikes have merely been pushed back, not diminished. Overall, the general tone heading into the holiday weekend remains the same: loose Fed policy remains dollar negative, while abundant liquidity and low real interest rates are good for risk appetite, prompting demand for higher-yielding, growth-linked currencies. Sterling broke out on Thursday and is likely to continue to outperform.
Similar Posts:
- Forex Plan & Video For US Core Retail Sales 07/14/10
- FOREX-Euro hits 1-mth high; Aussie dips on weak data
- Markets Remain Resilient Despite Downgrades and Turbulence
- FX OUTLOOK-Dollar may fall as US debt ceiling deadline nears
- FOREX NEWS -Euro has best week since Jan. but no curtain call seen
