The way ahead for the dollar

EUR: Just data from Italy worth watching, but it’s unlikely to cause too many issues for the single currency.  Industrial production is seen flat in month on month terms, whilst GDP is the final release so not a risk for markets.

Idea of the Day

Last week was the worst for the dollar for 20 months(using the dollar index), with this marking a strong turn-around from the perception that the Fed was moving towards a position of being able to start ‘tapering’ the amount of monthly bond purchases.

But it was also about other currencies, most notably the yen, where the market appeared to lose some faith in the ability of the government to push through some of the reforms needed to kick-start the economy.  This potentially sets us up for another volatile week of trading.

The theme that offered strong support to the dollar in May has been undermined, so this week will be a case of seeing which argument wins out (Fed ‘tapering’ or QE continuation), with the employment report on Friday not helping the market with this decision.

Latest FX News

USD:  The dollar re-asserting itself in Asia trade.  USDJPY crept higher, holding above the 98.00 level for the most part. 

JPY:  Small upward revision to final GDP data seen for Japan, rising 0.6% in Q1 vs. previous estimate of 0.4%.  Data giving stocks a boost (Nikkei up nearly 4%) and softening the yen, USDJPY holding above the 98.00 level for the most part.

AUD:  The Aussie once again making a new low for the year, having failed to hold up to the better dollar tone.  Low on AUDUSD seen at 0.9394, with recovery seen thereafter, holding above the 94.00 level for the most part.

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S&P changes US credit outlook from negative to stable – Dollar Rises

Credit rating agency Standard and Poor’s changed the credit outlook for the US from negative to stable, meaning that it does not see a chance of more than 1 in 3 to lower the credit rating from the current AA+ rating.

This is the same agency that made the historic downgrade in August 2011. Then, the move helped the dollar on risk aversion, sending money into the safe haven dollar. And this time, the atmosphere is totally different:  it helps the dollar recover on hope that the US is recovering.

Here are key parts from the statement:

… leads us to expect the U.S. general government deficit plus non-deficit borrowing requirements to fall to about 6% of GDP this year (down from 7%, in 2012) and to just less than 4% in 2015.

… We believe that our current ‘AA+’ rating already factors in a lesser ability of U.S. elected officials to react swiftly and effectively to public finance pressures over the longer term in comparison with officials of some more highly rated sovereigns and we expect repeated divisive debates over raising the debt ceiling. We expect these debates, however, to conclude without provoking a sharp discontinuous cut in current expenditure or in debt service.

So, all in all S&P sees the deficit falling and the political stalemate is already priced in.

Currencies reaction

• EUR/USD is under 1.32, and already tested the low end of the narrow 1.3180 – 1.3230 range with which it began the week.
• USD/JPY made the break above 99, extending the recovery once again. It enjoyed a jump in Japanese stocks earlier.
• GBP/USD dipped under 1.55 but managed to recover, as it has reasons to rise.
• The vulnerable Aussie is retreating again, not enjoying the recovery to 0.9460 for too long. Will it tackle support at 0.9388? It already got close in the wake of the new week.

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Forex - EUR/USD dips as S&P move bolsters demand for greenback

The euro softened against the dollar on Monday after the Standard & Poor's credit ratings agency hiked its outlook for U.S. ratings, which strengthened the dollar.

In U.S. trading on Monday, EUR/USD was down 0.06% at 1.3214, up from a session low of 1.3177 and off from a high of 1.3230.

The pair was likely to find support at 1.3177, the earlier low, and resistance at 1.3306, Thursday's high.

Standard & Poor’s earlier revised its long-term outlook on U.S. credit ratings to stable from negative.

The agency affirmed the country's AA+/A-1+ rating.

"The stable outlook indicates our appraisal that some of the downside risks to our ‘AA+’ rating on the U.S. have receded to the point that the likelihood that we will lower the rating within the next two years is less than one in three," Standard and Poor's said. 

"We do not see material risks to our favorable view of the flexibility and efficacy of U.S. monetary policy. We believe the U.S. economic performance will match or exceed its peers’ in the coming years. We forecast that the external position of the U.S. on a flow basis will not deteriorate."

The news boosted expectations for the Federal Reserve to begin scaling back stimulus measures soon now that the economy appears to be improving.

Stimulus measures, such as the Fed's USD85 billion monthly bond-buying program, weaken the dollar to spur recovery.

The dollar continued to see support from Friday's jobs data.

The Bureau of Labor Statistics said the U.S. economy added 175,000 jobs in May, beating expectations for an increase of 170,000, after 149,000 jobs were created the previous month. 

The headline U.S. unemployment rate ticked up to 7.6% last month, from 7.5% in April as more individuals entered the labor market and began fresh job searches.

Meanwhile in France, industrial output rose 2.2% in April from March, beating market calls for a 0.3% gain, which gave the euro support.

The euro, meanwhile, was down against the pound and up against the yen, with EUR/GBP trading down 0.03% at 0.8500, and EUR/JPY trading up 1.40% at 130.76.

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