Forex: weekly review.[E]

Dollar was firm as the week started, based on geopolitical risk. That time a “buck” appeared a “safe-heaven” currency and strengthened despite weak economy data from US. Besides on Monday the focus turned back to interest-rate differentials which could continue to dominate the on the market. We could see EUR strengthening which has already covered weekly losses versus USD till Friday. US PPI and core CPI data released last Tuesday and Wednesday were above expectation showing June inflation data growth. The official statistics signal PPI added 0.5% after May 0.2% advance. CPI data grew on 0.3% while average estimations were +0.2%. Inflation figures bolstered speculations Fed will continue it’s 2-years tightening policy and will make an additional rates hike on a next August meeting.
Druh Metus from Lehman Brothers said “ CPI makes evident the wider inflation pressure and leaves no choice to Fed”
Market players have now a 47% odds FOMC will boost it's borrowing costs to 5.5% next FOMC meeting after 67% at the beginning of this week.
The dollar winning pace on Wednesday was stopped by Fed Chairman Ben Bernanke’s speech to a Congress which appeared less “hawkish" than expected. He said “ inflation to moderate in a coming quarters” that disappointed USD bulls
The Fed’s chief mentioned the U.S. economy seems slowdown amid high oil prices and real estate cooling. Thus Bernanke almost mopped up bets US benchmark rise to 5.5%. Ahead of the testimony USD firmed the six-days in a row versus euro.
Bear Stearns economists assume « FOMC August 8 meeting seems to be in a shadow for us as it’s decision still depend on some future incoming economy data».
Ahead of the meeting the Fed will also watch a Q2 GDP on July 28 and employment data on August 4 before making decision. Bear Stearns forecasts FED to take pause in August before tighten to 5.5% on September 20.
Thursday was the second day of USD weakening. It was caused by Fed minutes, according to which ``Many FOMC members noted significant uncertainty accompanied the appropriate setting of monetary policy and one of them determined decision to lift interest rate was a risk.’’ Also FOMC members noted paces of economy slowdown and impressed worries about higher core inflation. However they said increasing slump allows to contain inflation pressure.
«We got a signal peak of interest rates is almost reached and this fact pointed USD will remain under pressure,’’ said Sabrina Jacobs, Dresdner Kleinwort.
The ECB will likely boost it’s borrowing costs to 3% on August 3, according to analysts’ forecasts. Fundamental data show economy recovery besides inflation still remains above the ECB 2% “comfort level”.
The sterling was supported with the economic news from Britain. Thus UK retail sales in June exceeded forecasts and showed the growth 5 month in a row (+0.9% versus +0.7%), the longest period of rising since January 2004. On Friday Q2 GDP preliminary estimations were published. Data signal GDP growth made 0.8% q/q against 0.6% in Q1.
Traders had pushed up the yen ahead of the announcement on speculation the PBOC would instead seek to strengthen the yuan on the one-year anniversary of the removal of the peg to the dollar. It has gained 1.5% since the peg was ended July 21 2005. A stronger yuan makes goods from China more expensive abroad compared with Japan's.
Gains in the yen may be limited by speculation yields in the U.S. and Europe will stay higher after BOJ Governor Toshihiko Fukui last week said the central bank will keep rates “very low'' after it raised borrowing costs for the first time in almost six years to 0.25% finishing era of zero rates.
But at the beginning of a week the yen gains were limited amid North Korea tensions. As Korea journal JoongAng Ilbo informed, North Korea leader urged the militaries and civilians for alert after it fired seven missiles into the Japan Sea on July 5. Within those missiles was Taepodong-2 which can reach Alaska’s coast, some American officials said. Last time country was in alert 13 years ago after “nuclear agreement” was canceled. OUN’s resolution on North Korea to cut further fires was signed on July 15. Besides it was forbidden to buy or sell such technologies.