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Dollar recovers after risk appetite rebounds on lessening EM fears


The dollar rose on Tuesday, gaining especially versus the yen after emerging market concerns eased. On the data front it was a better day than Monday, when ISM Manufacturing had shown a shock fall. Data released on Tuesday showed Factory Orders in December weakening by a less-than-expected -1.5% compared to the -1.8% expected, IBD/TIPP Economic Optimism falling only 3 basis points, compared to the 7 basis points expected, and ISM New York rising to 64.4 from 63.8. The dollar was also supported by commentary from Richmond Fed’s Lacker who said that the “hurdle ought to remain pretty high for pausing tapering” and that it had not reached that high yet. Commentary from Fed official Charles Evans, however, contradicted Lacker’s remarks after he argued more accommodation was required – not less – given persistently low inflation in the economy.


The euro fell on Tuesday, as Euro-zone PPI in December continued to show subdued price growth even though it came out in line with expectations. PPI fell by a more muted -0.8% compared to the -1.2% previously, and rose by a higher 0.2% m/m from -0.1% in November, but was nevertheless still considered quite low. Data from Spain probably weighed on the single currency after it showed a 113k rise in the number of new unemployed. The twin problems of unemployment and inflation will have added pressure on the ECB governing council to ease policy at their rate meeting on Monday. Global risk aversion lightened after Monday’s heavy sell-off but remained fragile, and probably still vulnerable to further shocks. The main focus is now on the ECB meeting, with a growing consensus of opinion that Draghi will announce more accommodation to help stimulate the euro-area which remains behind the recovery in other developed countries.


The pound rose on Tuesday after data showed a higher-than-expected rise in Construction PMI to 64.6 from 62.1 previously. The index had been expected to fall marginally to 61.5. This came after poor Manufacturing PMI on Monday undershot forecasts and led to sterling weakness. The BOE monthly rate meeting is the next major event for the pound on Thursday. No changes to policy are expected but there is a possibility the detail of the central bank’s forward guidance could be altered. The governor of the BOE Mark Carney hinted recently in Davos that the current guidance relied too heavily on too few indicators, which points to the possibility that a wider number might be used if the BOE decide to tweak guidance at their meeting.


The yen fell on Tuesday after emerging markets fears eased and data from the U.S in particular came out better-than-expected. Figures showed that the Monetary Base in January, which measures the amount of money in circulation and the level of money from commercial banks deposited with the BOJ, slightly pulled-back to 200bn from a revised down 201bn in the previous month; year-on-year it rose 51.9% from 46.6% previously. The rise in the annualized figure far exceeded expectations, and may have weighed on the currency. Recent data showing robust inflation had helped strengthen the yen, although it mainly benefited from safety flows after emerging market fears and poor U.S data highlighted the fragility of the global recovery. Later today data is scheduled for release which will show foreign financial asset purchases by Japanese and foreign investors in the week ending 31st Jan.

Wednesday, 05 Feb, 2014 / 7:56

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