The Dollar declined heavily against the majors yesterday, falling 0.8% versus the Pound as we approach the yearly high towards 1.9175 and a further 0.7% against the Euro to trade near a six month low. The Dollar sell-off can be attributed to a number of reasons, not least the rumours that investors were considering unwinding U.S carry trades in the build-up to the Thanksgiving holiday. In addition, a surprisingly negative report from the Council of Economic Advisors showed a dramatic cut in U.S growth forecasts this year with the CEA blaming the housing slump for its revisions. As a result, the Dollar came under increased pressure against the majors as speculation intensifies that the Federal Reserve will begin cutting interest rates in the first quarter of 2007 to supplement slower economic growth and reduced inflation pressures. In terms of economic data the Dollar continued to tumble against Sterling as the weekly jobless report showed an unexpected rise in the number of new claims. With speculation building that the U.S unemployment rate is set to jump from 4.4% to 4.6%, we can expect the Dollar to struggle in the build up to the Nonfarm payrolls figures early next month.
The Euro advanced against the Dollar yesterday following a hawkish rhetoric from the Primeminister of Luxembourg, Jean Claude Juncker, who stated that the European Central Bank should keep its political independence and discarded recent concerns from Jacques Chirac over rising interest rates and the strength of the Euro. The single currency has also held firm against the Pound this morning despite a worse-than-expected report on German economic growth, which showed that Europe’s largest economy had slowed in the third quarter, primarily due to a slowdown in construction spending. German GDP, the value of all goods and services, rose 0.6% from the second quarter following the fastest growth since 2000 but it seems the report will do little to stop the ECB from raising Euro-zone interest rates early next month. However, the Euro may come under some pressure later today as German business confidence is expected to decline in November on concerns that rising interest rates and the highest sales tax increase since the Second World War will weigh heavily on economic expansion next year.
The Pound made significant gains against the Dollar yesterday and held firm against the Euro following the release of the minutes from the Bank of England’s last policy meeting where the MPC elected to lift UK interest rates for the second time this year. The committee voted 7-2 in favour of a rise in rates with David Blanchflower and Rachel Lomax deciding to keep borrowing costs unchanged, expressing downside risks to demand and inflation. Policy makers elected to lift the benchmark interest rate to 5.0% on concerns that wage growth would keep inflation above the government’s 2.0% target. However, the minutes didn’t give away too many clues with regards future monetary policy and it seems that the BoE will adopt a ‘wait and see’ policy over the coming months and if the projected rise in wage growth doesn’t occur then rates may stay at 5.0% for some time.
Data Released 23rd November
EU 09:00 Current Account Balance (September)
GER 09:00 Ifo Business Confidence Index (November)
U.S Thanksgiving Holiday – Market Closed
written by Adam Solomon
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