Currencies

Wednesday May 7, 03:58 PM
Forex - Dollar remains near highs despite more weak U.S. housing data

LONDON (Thomson Financial) - The dollar remained near a one-month high against the euro and scaled a two-month peak against the pound even as U.S. housing data continued to disappoint.

A 1.0 percent fall in pending home sales in March for a massive 20.1 percent yearly decline was simply more confirmation the property market has further to fall.

However, a string of weak data in both the euro zone and UK have attracted the most attention, allowing the greenback to keep rallying.

The euro was hit by soft euro zone retail sales for March, which fell 0.4 percent, much weaker than analysts' forecasts of a 0.3 percent rise.

The data added weight to the view that the euro zone's economic slowdown is finally gathering pace, and that the European Central Bank will be forced to acknowledge this at the policy meeting on Thursday.

'We certainly do not expect (ECB President Jean-Claude) Trichet to temper his persistent hawkish rhetoric as oil prices surge to new highs, but to shed more attention to the downside risks of the euro zone economy,' said Ashraf Laidi, chief forex strategist at CMC Markets.

The pound, meanwhile, has continued this week's sharp drop as economic data has repeatedly disappointed expectations, thereby resurrecting the chances of a Bank of England rate cut on Thursday.

Nationwide's consumer confidence indicator overnight fell to its lowest level in its four-year history, while official data for manufacturing activity showed a sharper-than-expected decrease in output despite the weaker currency.

The data has pushed a minority of economists to revise their forecasts in favour of a quarter point cut on the grounds that the BoE may expect weaker growth to dampen the inflation threat.

However, a majority still believe that the worryingly high inflation data will persuade most BoE rate-setters to avoid a back-to-back rate cut, something the central bank has not done in seven years.

'We believe that a BoE cut at this stage is unlikely, even given the recent deterioration in the UK data,' said Hans Redeker at BNP Paribas (Paris: FR0000131104 - news) .

He noted that the publication of the Inflation Report this month will show prices pushing higher for months yet, and that with oil prices at new record levels, a quick fallback in inflation is not guaranteed.

Even if the BoE does not cut this week, however, a move next month would be a virtual certainty.

'Although (the pound) may rebound following an unchanged decision from the BoE Thursday, such gains are likely to prove short lived and limited, providing a renewed selling opportunity,' said Redeker.

London 1435 GMT London 1207 GMT

U.S. dollar

yen 105.32 unchanged 105.32

Swiss franc 1.0577 up from 1.0556

Euro

U.S. dollar 1.5387 down from 1.5433

yen 162.06 down from 162.56

Swiss franc 1.6275 down from 1.6292

pound 0.7880 down from 0.7884

Pound

U.S. dollar 1.9526 down from 1.9566

yen 205.65 down from 206.07