Analysis / Finance / forex / Money

Dollar On Defensive

One Pound

Sterling hovered near a 5-1/2-month high against the dollar on Friday, still riding a post-election rally that has left it on track for its best fortnightly performance against the greenback in six years. Investors had for months worried that no party would win a majority in last Thursday’s UK parliamentary election, which could have led to weeks of policy uncertainty until a coalition emerged. But that risk evaporated when the Conservatives won an outright majority for the first time in 23 years. Sterling has risen around 3.5 percent since the results were announced, taking its fortnightly rise to over 4 percent – its strongest gains since May 2009. Currency traders largely brushed off a Bank of England Inflation Report earlier in the week which cut growth forecasts and warned about a strong pound’s impact. Sterling briefly dipped afterwards, but its losses were short-lived. Some analysts, though, think sterling’s post-election rally will be temporary, and see risks for the currency, including the eye watering national debt and the popularity of the leftist Scottish National Party. The pound was flat on Friday at $1.5775, close to a 2015 peak of $1.5815 hit the previous day, its strongest since late November. Against the euro, sterling was 0.1 percent stronger at 72.275 pence. The pound was also boosted earlier in the week by data that showed British earnings growth had picked up more than expected in the first quarter of the year. The Bank is keeping a close eye on labour costs as it considers when to start raising interest rates.

euro

New worries about the US economy, and rising expectations for the Eurozone, are providing some lift to the formerly struggling euro. In the wake of soft US numbers in recent weeks, EUR/USD last week climbed to its highest level since February. The gain marks a reversal of the single currency’s year-long slide against the greenback. The macro profile on both sides of the Atlantic offers support for the reversal. Indeed, the Eurozone’s economic numbers have improved of late while the US data has been disappointing for several key indicators. Upbeat expectations for Europe’s second-quarter GDP continue to give the euro an edge at the moment against sluggish forecasts for the US. Euro-dollar opened in Asia at $1.1446, little changed from Friday’s close in New York. Early attention was on news concerning Greek debt but the market impact appeared to be limited so far. The pair marked a rather narrow $1.1432 to $1.1453 through the early hours of the session.

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The dollar was lower against the euro and the yen on Friday after a fresh batch of weak U.S. economic data underlined expectations that the Federal Reserve will delay hiking interest rates until the economy is on a stronger footing. Data showed that U.S. industrial production fell for the fifth straight month in April and another report showed that U.S. consumer sentiment deteriorated to a seven month low this month. The Federal Reserve said industrial output slid 0.3% after a revised 0.3% decline in March. Economists had expected an increase of 0.1%. The University of Michigan’s preliminary reading of the consumer sentiment index for May came in at 88.6, down from a final April reading of 95.9 and worse than forecasts for a reading of 96.0 The reports came after disappointing data on retail sales and producer inflation earlier in the week and dampened hopes for a second quarter rebound after a sharp slowdown in growth in the first three months of the year. The U.S. Dollar Index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, was at four-month lows of 93.29 late Friday. The index ended the week down 1.8%. It was fifth consecutive weekly decline, marking the longest period of declines in four years.

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