The near to medium-term outlook of the US dollar in the currency markets is one of relative strength, particularly against the Euro, Swiss franc, British pound and Japanese yen. Ever since Bernanke indicated he has his eyes fixated on the weakening dollar last week, together with US Treasury Secretary Paulson and president Bush reiterating this week their commitment to a stronger dollar, the change in dollar sentiment has been quite dramatic, although it went a little shaky after ECB’s Trichet said a small rate increase is possible in July.

US retail sales report released today is USD-supportive as it showed that retail sales increased twice as much as forecast in May, climbing 1%, following a 0.4% gain in April that was previously reported as a decrease. This overall 1% gain is the most since November 2007 as American consumers spent their tax rebates at electronics and department stores, some of which offered promotions tied in with the tax rebates (Wal-Mart including). High gasoline prices at pump stations also contributed to the increase in sales, but excluding that, purchases rose 0.8%. Retail data from the previous two months were revised upward - a good sign as those accounted for sales prior to the stimulus package.

Even though this Tax Rebate Effect is only temporary, and is expected to plump up figures for the second and third quarter, it is nonetheless helpful to the notion of a still-seemingly-”resilient” US economy that is trying its best to hang on. Consumer spending makes up about 70% of US GDP, so money that gets spent is good for the overall economy. By the time the Tax Rebate Effect runs out probably in the last quarter, consumer spending could once again be dented by the lousy job market.

US import prices also released today rose in May for the third month in a row, again proving that inflationary pressures are rising in the US. Import prices jumped 2.3% (2.5% expected) in May after rising 2.4% in April. Year-over-year, prices are up a record 17.8%.

G8 Meeting

Don’t forget the G8 meeting is coming up this weekend in Osaka, Japan. Traders are likely to pare their USD short positions ahead of that as G8 finance ministers are likely to discuss recent currency moves although forex may not appear in the final statement.

ECB Says

Trichet and another ECB member Stark have said that the financial markets should not be expecting a series of increases as the ECB is not precommitted to that. ECB’s Lorenzo Bini Smaghi said today that policy makers “only sent indications for July, not beyond”.

Forex Trading

The US dollar gained strength today. EUR/USD fell 180 pips to a low of 1.5380, and bear targets lie around 1.5360, 1.5310, 1.5280. If EUR/USD breaks past support after support, it could move towards 1.5000 in the medium-term. USD/CHF went to a high of 1.0490, with upside targets around 1.0530, 1.0560, 1.0590-1.0600. GBP/USD fell 200 pips today to a one-month low of 1.9435, and Pound bears are likely to sell rallies into 1.9500.

The Australian dollar has had a sharp fall versus the US dollar today after the Aussie government reported that employers unexpectedly cut jobs last month. AUD/USD hit an intraday low of 0.9330, and 0.9290-09300 is nearest support, followed by 0.9270.

Friday:

Reserve Bank of Australia Governor Stevens speaks 0310 GMT

Bank of Japan monthly report 0600 GMT

German CPI 0600 GMT

US CPI 1230 GMT

US U of Mich consumer confidence 1400 GMT

Greenspan speaks in Mexico City 1600 GMT

Posted in Categories: Economy, Forex.

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