Currencies

Wednesday May 7, 01:39 PM
Forex - News of consumer malaise dents euro

LONDON (Thomson Financial) - News of a euro zone wide consumer malaise dented the euro, pushing it to the low $1.54 level.

Euro zone retail sales fell 0.4 percent in March from February, and were down 1.6 percent year-on-year, much weaker than analysts' forecasts of a 0.3 percent rise.

The figures add to the growing belief that economic growth in the euro zone will slow markedly, eventually leading the European Central Bank to lower interest interest rates in the coming months.

'March's euro zone retail sales figures confirm that spending remains worryingly weak,' said Jennifer McKeown of Capital Economics.

'For the time being at least, it is clear that the domestic household sector is doing nothing to make up for slowing external demand,' she said.

'The second successive monthly decline in retail sales in March maintains scepticism that the consumer will significantly help out the euro zone economy over the coming months,' said Howard Archer of Global Insight.

He said high inflation, tighter credit conditions and interest rates, and concerns over the economic outlook appear to be deterring consumers from spending.

The bad news did not stop there. Coming closely on the heels of the retail sales figures, German manufacturing orders fell 0.6 percent month-on-month in March, confounding market expectations for an increase of about 0.5 percent.

'Orders have now fallen for four months running. This follows a combined 6 percent-plus increase in October and November (Frankfurt: A0S9N7 - news) , but nonetheless is a clear sign of moderation,' said Dominic Bryant of BNP Paribas (Paris: FR0000131104 - news) .

Against this backdrop and given that the euro has risen from levels in the mid-$1.30 level around this time last year, the euro struggled throughout Wednesday's session.

In the UK, bad news weighed on the pound. Nationwide building society said on Wednesday consumer confidence slumped to its lowest level since records started in May 2004, while a survey from accounting firm KPMG and the Recruitment and Employment Confederation said permanent staff wages rose at the slowest pace since April 2003.

The surveys follow Tuesday's purchasing manager's index on the service sector, which fell to 50.4 in April from March's 52.1, the weakest reading since March 2003.

Last week, the Monetary Policy Committee, which begins its two day meeting on Wednesday, was seen as odds-on to leave rates unchanged but now several analysts are starting to change their view.

'As a result of the recent softer economic news, we have decided to revise our call from unchanged rates to a 25 basis point cut at this week's meeting,' said George Buckley at Deutsche Bank (Frankfurt: DB9999 - news) .

Elsewhere, the dollar was firmer following hawkish talk from Federal Reserve members.

Dallas Fed president Richard Fisher said in an interview that it would take a dramatic slowdown to justify further rate cuts, and that the dollar's rebound signals increased confidence in the Fed's determination to tackle inflation.

Analysts said there is a growing consensus that U.S. rate cuts are coming to an end, while it is still up for debate when the European Central Bank will start to lower borrowing costs, supporting the U.S. currency.

'Expectations for the U.S. economy and Fed rates are stabilising but the ECB may need to switch gears and put easing on the agenda soon,' said Geoffrey Yu, currency strategist at UBS (Virt-X: UBSN.VX - news) , adding that this should encourage dollar strength.

London 1207 GMT London 0905 GMT

U.S. dollar

yen 105.32 down from 104.75

Swiss franc 1.0556 up from 1.0521

Euro

U.S. dollar 1.5433 down from 1.5504

yen 162.56 up from 162.42

Swiss franc 1.6292 down from 1.6312

pound 0.7884 up from 0.7867

Pound

U.S. dollar 1.9566 down from 1.9703

yen 206.07 down from 206.37