Tuesday, June 5, 2007

Forex - Dollar pares losses after Bernanke comments, ISM data

LONDON (Thomson Financial) - Losses in the dollar were pared against sterling and the euro following firmer-than-expected ISM services data and Federal Reserve chairman Ben Bernanke's comments that the US economy will recover.

Bernanke predicted that the economy will rebound in the near term from an anaemic performance at the start of the year, even if the housing slump continues.

IFR Markets' Jamie Coleman said while the comments are fairly upbeat on the US economy, it indicates the Fed 'needs to be in no hurry to act either to hike or cut rates'.

Daragh Maher at Calyon said Bernanke's comments are not new, but has provided an excuse to profit take from the euro's current strength against the dollar.

Strong service sector data from the Institute for Supply Management for May had a 'pronounced impact', providing 'more momentum' for the dollar to rally, Maher added.

The non-manufacturing business index rose to 59.7 from 56.0 in April, beating expectations for a second straight reading of 56.0.

The dollar moved to day highs against the pound following the news and firmed against the euro, although it remains close to recent-lows.

Meanwhile the euro remained well bid against other currencies after soft retail sales data did little to sway expectations for rising euro zone interest rates.

Euro zone retail sales for April were up 0.2 pct from March, missing expectations for a 0.9 pct rise following March's 0.5 pct gain.

Madeleine de Villiers, European economist at Capital Economics, said the data are 'much weaker than we had expected' but nonetheless pave the way for retail sales to be stronger in the second quarter than the first.

Earlier, the May PMI survey of the euro zone's services sector came in just above expectations at 57.3, while the pricing measure eased to a five-month low of 53.1.

However, both data are unlikely to do anything to dispel expectations that the European Central Bank will hike its benchmark repo rate by a quarter point to 4 pct tomorrow, following a string of robust economic figures. After that, more and more Bank watchers think the ECB will hike again, possibly as soon as September.

Meanwhile, the Australian dollar and the New Zealand dollar remained firm against the yen, with a swell in risk appetite fuelling the yen carry trade -- where investors borrow the cheap Japanese currency to invest in higher yielding assets elsewhere.

Ashraf Laidi, chief foreign exchange analyst at CMC Markets, said that rising risk appetite -- prompted by a recovery in the Shanghai index -- means that 'forex markets continue to favour high yielding currency combinations,' with the Aussie and Kiwi dollars among the beneficiaries.

The Reserve Bank of Australia will announce its latest decision on interest rates overnight, along with first-quarter GDP data, while Reserve Bank of New Zealand meets Thursday on its latest interest rate.

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