By DailyFX - US Dollar.The performance of the US dollar against the majors has been very mixed today. The Euro managed to recover some...

... gains, but the British pound and Japanese Yen continued to lose strength.


Jobless claims increased to 277,000 for the week ending February
4, which brought the four week average to the lowest level since April 2000. The
level of claims continues to suggest that the labor market remains healthy while
hawkish comments from Fed President Moskow also helped to boost the dollar. Moskow,
who is a nonvoter said that interest rates are currently at a "neutral level" but
more rate hikes may be needed, even preemptive ones in order to keep inflation
expectations anchored. The rally in the dollar against the Japanese yen was
particularly strong thanks to suspected demand by the Japanese for the newly
reintroduced 30-year bonds. Although the Treasury felt that demand was superb, the
amount of bids received was slightly less than forecasted. Tomorrow we are expecting
the only piece of data due for release this week that could potential give us some
new talking points. The US trade deficit for the month of December is expected to
widen from -$64.2 billion to -$65 billion. Holiday shopping is should have boosted
imports while a decline in aircraft orders should have weighed on exports. Even
though oil prices were softer in the month of December, higher import volumes should
have offset any potential improvements. The futures contracts continue to price in
a very high likelihood of a March rate hike followed by the growing possibility for
a May hike as well. Trading continues to remain quiet. With the US dollar trading
near its highest level against the Euro and Japanese Yen since the beginning of the
year, the market is getting a bit overextended and as a result, may need a clear
catalyst before pushing even further.

Euro

Trading in the Euro remains quiet today as the currency fluctuates within a tight
range against the US dollar. The Euro is getting a boost from new developments on
Russia's Paris Club debt repayment and the release of the European Central Bank's
monthly bulletin. According to the Russian Finance Minster, the country plans on
repaying another $10-12 billion of their Paris Club debt this year. In order to
repay this debt, Russia would need to purchase a large amount of Euros. Meanwhile
the monthly bulletin released by the European Central Bank confirmed the hawkish
comments recently made by both Trichet and Liebscher. The report warned that the
central bank will have to remain vigilant since inflation still has the risk of
ticking higher. In other words, the ECB is essentially telling us that they plan on
raising interest rates relatively soon. For those who have been trading the FX
market for the past 2 years, you may recall that the ECB likes to prepare the market
for an impending change to their monetary policy. Unlike Greenspan who preferred
the surprise factor, the ECB frequently gave the market a chance to price in a
potential change in rates before actually making a change. In doing so, they are
trying to prevent any sharp unwanted movements. The big surprise today actually
came from Switzerland which reported a sharp jump in consumer confidence in the
first quarter. The index leaped from -15 to +2, the first time in 4 years that the
index is back in the green. The Swiss National Bank is on path to raise interest
rates by a quarter point in March. SNB Roth indicated that there should be no
surprises at the next meeting and judging from his comments and the market's
expectation, we take that to be a confirmation for a rate hike.

British Pound

The British pound sold off against the dollar for the fifth consecutive trading day
following a dose of weak economic data. The house price survey published by Halifax
indicated that the value of homes fell for the first time in eight moths by 0.4
percent. This comes after two months of strong price increases. The trade deficit
for the month of December also jumped slightly from GBP6.01B to GBP6.06B. Although
the rise was nominal, the big disappointment was that the market had expected the
trade deficit to improve and on top of that the deficit for the month of November
was revised to a larger figure. Even though the Bank of England left rates
unchanged as expected, the market still continues to mull over the possibility of
another interest rate cut by the Bank of England.

Japanese Yen

The Yen took another tumble today on speculation that the Japanese may have been big
buyers at today's 30 year Treasury auction. The Bank of Japan delivered no
surprises as they left both monetary policy and their outlook on the economy
unchanged. For those who have been hoping for a rate hike thanks to a recent fund
advisory report, BoJ Governor Fukui's lack of a clear answer on whether monetary
policy will be changed at the next meeting may be an indication that they have yet
to get the green light from the government to end quantitative easing. We do not
expect the government to budge anytime soon. Analysts are predicting a possible
rate move in April, but we think that this timing may still be a bit optimistic
given the fierce battle that the Japanese government has put up over the past few
months.


By DailyFX