By DailyFX - US Dollar .The foreign exchange markets have been extremely quiet today with the dollar giving back a nominal portion of yesterday’s gains....

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Overall, dollar strength remains
dominant. With a light economic calendar, consolidation continues to be the main
theme amongst the majors. The markets are still jittery about the escalating
tensions with North Korea, which is the main geopolitical risk at the moment. In
the latest news, the US has announced that in reaction to North Korea’s threat, they
have pushed their interceptor missile defense system from the testing to operational
phase. Although slightly encouraging since it gives North Korea a good reason to
reconsider any plans of launching their missile, if they do decide to do launch
anyway and the US intercepts it, tensions between the two countries could escalate
even further, which would be bad for the US dollar. Meanwhile, after yesterday’s
horrid National Association of Home Builders sentiment index, today’s stronger
housing starts were certainly a relief. However before jumping the gun and becoming
too excited, the rebound comes off of a 13 month low and was induced by incentives
as well as backlogs. Furthermore, building permits, which is a better indication of
the future of the housing market fell 2.1 percent. We are still looking at numbers
that support cooling versus crashing * which for the time being still lets the
Federal Reserve focus on inflation. The market continues to price in a quarter
point rate hike next week and a more than 50 percent chance of another rate hike at
the end of August. With nothing significant on tomorrow’s US economic calendar, we
will probably be looking at more thin range trading. Moving up north, Canada posted
very strong inflation numbers this morning, with both the headline and core prices
rising 0.5 percent. This has capped gains in USD/CAD and raises the possibility of
another interest rate hike by the Bank of Canada. It also makes tomorrow’s speech
by Governor Dodge even more important in determining the next direction for the
Loonie.

Euro

Conflicting economic data from the Eurozone leads to unchanged price action in the
Euro against the US dollar. German producer prices were slightly softer, rising by
only 0.1 percent, compared to the market’s 0.3 percent forecast. In contrast,
Italian data was exceptionally strong. The country’s unemployment rate slipped from
7.6 percent to 7.4 percent in the first quarter while industrial orders leaped 6.8
percent in the month of April. Even industrial sales fell a less than expected 1.9
percent. Things appear to be certainly improving in Italy and it comes at a good
time when the blockbuster numbers that we are use to seeing from Germany fail to
meet the bar. Meanwhile the Euro is holding steady above 1.2500. Although it still
appears weak, significant losses should be limited in the currency pair since the
European Central bank still plans on raising interest rates. ECB President Trichet
will be speaking in Brussels tomorrow and we will be listening intently for any
comments on monetary policy. Their next meeting that comes with a press conference
willl not be until August, so they have plenty of time to consider their options.

British Pound

The British pound ended the day unchanged against the US dollar. The UK data that
was released this morning was mixed with public sector finances increasing from -1.4
billion to 7.4 billion and net borrowing rising from 0.2 billion to 10 billion.
These higher numbers reflect a worsening fiscal condition while money supply growth
slowed from 1.3 percent to a less than expected 0.6 percent. The positive news for
the day was that consumer credit and mortgage lending improved with lending hitting
a 2 year high. Overall, the numbers suggest that inflation fears may still be
premature while the housing market continues to show signs of stabilization.
Meanwhile, the Bank of England is set to release the minutes from the most recent
monetary policy meeting tomorrow at which they left interest rates unchanged once
again. Recent economic data gives them no reason to shift away from their neutral
stance. However, this is the first meeting for new MPC member Blanchflower, who
replaced Nickell, a member that was typically known to favor looser monetary
policies. Of particular note will be how the Blanchflower voted. If he is dovish
as well, then he fits Nickell’s shoes well, but if he is hawkish, then the dynamic
within the monetary policy committee could shift ever so slightly.

Japanese Yen

The Japanese Yen was the day’s biggest mover as the currency strengthened against
all of the other majors. The key catalyst for today’s rally was comments by Bank of
Japan Governor Fukui who said that “monetary policy decisions should be made early
and changes should be made in small increments.” The market interpreted these
comments to mean that the central bank may be considering raising interest rates as
early as June or August. However, perhaps reacting to the yen’s rally, Fukui came
on the wires later on to clarify his comments by saying that he did “not mean to
say” the central bank “would act earlier than market expectations.” Remember,
before his comments today, traders were expecting a rate hike no earlier than
September. We still believe that with Koizumi stepping down in September, the Bank
of Japan may opt to postpone any major changes to monetary policy to the fourth
quarter.


Kindest Regards,

Kathy Lien
Chief Strategist
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: klien@fxcm.com

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