Dollar’s bounce appears unconvincing
By Steve Johnson in London
Published: August 27 2004 11:51 | Last updated: August 27 2004 17:01
The US dollar enjoyed a rare bounce this week, but no one was convinced this was the start of a new trend. Indeed, there was some debate as to why the greenback had risen at all.
Some attributed a role to an easing in oil prices that, if extended, would remove a major hurdle to US growth. But two members of the Federal Reserve, Ben Bernanke and Robert McTeer, asserted this week that costly crude would not derail the US recovery.
There is no real consensus as to how the dollar should react to oil strength, with many arguing that oil’s inflationary impact will encourage the Fed to increase the rate of monetary tightening, helping to support the dollar.
This week’s US economic data were also less than conclusive. July durable goods orders beat expectations, but strip out transportation and they undershot.
“Lacklustre” and “disappointing” were the words tumbling from the lips of Paul Ashworth, economist at Capital Economics. “The smoking gun evidence” that the soft patch in the US economy will prove transitory, was the diametrically opposed view posited by the Bank of New York’s Michael Woolfolk, who pointed to strong orders once defence was stripped out.
Friday’s data flow was similarly unhelpful, with second quarter GDP downgraded, as expected, to 2.8 per cent, and the PCE deflator, the Fed’s favoured inflation measure, in line with forecasts.
The most convincing argument for dollar’s strength was that speculators who had shorted the dollar at the end of last week expecting a slide to $1.24 against the euro, had scrambled to square their positions when it became clear this was not going to happen.
As a result, the dollar rose 2.2 per cent on the week to $1.2040 against the euro, 2.2 per cent to SFr1.2797 against the Swiss franc and 1.3 per cent to $1.7938 againststerling, hitting a three month high in the process.
Sterling had been heading for a soft week as commentators continued to downgrade the likely peak in UK interest rates, with a 20 per cent fall in mortgage approvals in July the latest sign of a housing market slowdown.
But the pound bounced yesterday as GDP data indicated the consumer was still in rude health, pushing sterling 1 per cent higher to £0.6711 against the euro on the week.
The yen enjoyed a strong week, firming 2 per cent to Y131.77 against the euro, as the slide in oil prices more than offset yesterday’s weak inflation, retail sales and unemployment data. |
