Improving US Economy Hurts Dollar

In this week’s Dollar update by Moneycorp:
Nationwide reports a third successive monthly rise for house prices. America’s economy shrinks by less than expected in second quarter of 2009.

For almost all of last week the pound was unable to make any worthwhile progress against the dollar. On the Wednesday it even headed down for a careful look at $1.63. A Thursday recovery brought it back up to its starting point at $1.65 and there was an abortive rally on Friday morning that ran out of puff at $1.6550. The break came on Friday afternoon when sterling leapt from $1.65 to $1.67. It opened there this morning with investors trying to figure out whether they could push it through the old resistance at that level.

After the sell-off at the end of the previous week the market’s first instinct was to buy the pound, although nobody was quite sure why. Hometrack’s housing survey was vaguely helpful, inasmuch as it showed prices not falling, but investors found it difficult to get excited because prices were not going up either. It was a similar story with the CBI’s retail sales report for July: At -15 the figure was better than the previous month’s -17 but did nothing to motivate buyers. Money supply data on Wednesday were another net “don’t care” for the market. The number of mortgage approvals went up, true enough, but as Reuters put it; “British financial institutions lent less money to households last month than at any time in the past 15 years.” Gfk’s index of UK consumer confidence survey produced another utterly useless figure when it remained unchanged at -25.

Investors at last woke up on Thursday morning when Nationwide’s house price index came out. For a third successive month the building society saw a rise in the average price, this time by an entirely respectable +1.3%. The annual decline eased from -9.3% to -6.2%. The firm’s chief economist offered an impressive hostage to fortune, saying “there is now a reasonable chance that prices could end the year slightly higher than where they started.”

Sterling’s performance over the week obviously had something to do with the UK economic data – few thought they were – but mainly it was the by-product of another quiet week during which the mood of investors became more upbeat. As one of the allegedly riskier currencies it is more likely to find buyers when the market is less nervous.

The reverse is true for the dollar. Good news from the US economy – or, for that matter, from any other economy – adds weight to the belief that things are looking up. As the outlook brightens investors feel les need to take cover in the safe-haven dollar and yen. Although there was no overwhelming barrage of strong US figures there were enough of them to keep investors from pursing their lips. New home sales set the tone on Monday with an 11% monthly increase. Case/Shiller’s metropolitan home price index on Tuesday continued in the same vein, with a microscopic increase that slowed the annual pace of decline from -18.1% to -17.1%. The dollar received a little help from a fall in the Conference Board’s consumer confidence index and a -2.5% monthly fall in durable goods orders. Those were balanced by an eight-point rise in the Richmond Fed’s manufacturing index and by the fact that core orders for durable goods, excluding the effect of megabuck orders for aircraft, were up on the month.

It was Friday’s data that did the real damage. Gross Domestic Product – the US economy as a whole – had been forecast to decline by an annualised -1.5% in the second quarter of this year. In fact it shrank at a rate of just -1.0%. While this in no way constituted growth – it still had a minus sign in front of it so the economy was still in recession – it inspired hope that growth will emerge sooner rather than later. The data provided investors with the excuse they needed to give the dollar another kick in the groin and sterling jumped more than a cent higher.

For several weeks the pound has been meandering between technical support at $1.58 and resistance that has held firm at $1.67 since October. It looks now as though that pattern has come to an end. As long as sterling can consolidate above $1.67 we will be looking at a new range, the bottom of which will be $1.67 or thereabouts. There will doubtless be obstacles to overcome at $1.75, not least because it is an obvious round number, but if sterling can manage to cross that barrier its next target will be September’s highs above $1.86. Once the upward break can be confirmed, buyers of the dollar should raise their stop order to somewhere near $1.67 and hold on for better levels in the future.

For more information and expert guidance on the currency markets, call Moneycorp today on +44 (0)20 7589 3000, don’t forget to mention International Horizons to secure the best rates. Alternatively go to the Moneycorp website where you can open a free, no obligation Trading Facility.


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