Forex. Weekly review [E]

After two weeks of losses USD closed the week as a leader against EUR: +1.3%. Growth of geopolitical risks was a catalyst for bullish sentiment on dollar as a “save-haven” currency. USD gain against the yen was the most significant (+2.1%). Long months of Japanese interest rate increase expectations didn’t bring any pleasure: the central bank lifted the interest rate, but signaled it will continue to keep rates on “historical lows” in coming future.

BoJ made a historical decision about ending the zero-rate policy and raised its benchmark to 0.25%. Last time BoJ rose interest rate in August 2000, however, after 7 months it lowered benchmark because of economy slowdown. Despite the rate increase Japanese yen fell to 2-week lows. It was promoted by BoJ officials’ announcements the central bank proceed to keep interest rates “very low” that eased expectations of one more hike in the end of a year.

Before decision on interest rates, BoJ was under pressure of some policy makers, including Finance Minister Sadakazu Tanigaki who said it is early to speak about next rate rise. BoJ decision signals the coming end of deflation in the country, noted Japan's Prime Minister Junichiro Koizumi.

Meanwhile, USD strengthened on all front. Investors bought the dollar on escalation of the conflict in the Middle East. Conflict between Israel and Lebanon added to Iran’s nuclear program and North Korea launched missile. Instability in politics led to record oil gain.

Weak economic data didn’t prevent USD growth. Among them we should mentione the increase of trade balance to $63.8 bln. in May (against $63.3 bln.), reduction of retail sales (Retail Sales диаграмма) in June 0.1%, while analysts predicted the growth. Retail sales exclude auto rose 0.3%, the same in last month (Retail Sales (ex. auto) диаграмма). Michigan University report showed preliminary June consumer sentiments fell to 83.0 p.p. against forecast 86.0. Futures are pricing 52% chance of interest rates increase in August to 5.5% (Federal Funds 25 years диаграмма Federal Funds 50 years диаграмма).