NEWS / Foreign Exchange

The U.S. dollar traded lower overnight

The U.S. dollar traded lower overnight, weighed down by a stronger-than-expected German business survey, a less than inspiring read on consumer confidence and worries about a slowing U.S. housing market. U.S. consumer confidence slipped in March, solidifying the dollar??™s losses, reinforcing fears of a U.S. economic slowdown that could place additional pressure on the Federal Reserve to cut interest rates. The private Conference Board's March U.S. consumer confidence index fell to 107.2, from a downwardly revised 111.2 in February. Analysts had been expecting a reading of 108.5. Monday's unexpected sharp fall in U.S. new-home sales data also bolstered chances of Federal Reserve interest rate cut, adding further momentum to the perceived near-term divergence in U.S. and ECB monetary policy. Markets now look to tomorrow??™s official testimony by Fed Chairman Bernanke for near term direction.

The Euro was broadly supported by the release of Germany's Ifo business climate report - a measure of business sentiment - which reinforced expectations the European Central Bank will raise interest rates this year. The benchmark euro zone rate currently is 3.75 percent, while the Fed's key federal funds rate is 5.25 percent.
     
The British pound retreated from highs touched yesterday, after officials from the Bank of England stated the UK housing market is beginning to slow and inflation should ease, cooling expectations of another rate hike. The relatively dovish tone of the commentary caught markets off guard as expectations of a rate hike to 5.5 percent were broadly in place. UK data overnight was mixed, with mortgage approvals falling 5 percent on the year in February, but number of loans approved for house purchases rose sharply compared to January.
   
The Japanese yen held its ground against the dollar overnight, as recent upbeat commentary about the economy by a top official and annual repatriation flows ahead of corporate fiscal year-end established a solid foundation for the currency.
   
The Canadian dollar rallied against it U.S. counterpart this morning as results from the Quebec election made it unlikely the province will hold a referendum on separation any time soon. The sharp ascent of the Canadian dollar began late on Monday as results from the Quebec election showed the separatist Parti Quebecois party, which had wanted to hold a third referendum on Quebec independence, was knocked to third place from second. The ruling Liberal government dropped to a minority from a majority, while the Action Democratique - which wants more autonomy for Quebec while remaining part of Canada - will form the official opposition. The resource-linked Canadian dollar also drew some support from firmer gold prices. Markets will now focus on commentary from Bank of Canada Governor David Dodge, who is due to speak in New York on Thursday to The Americas Society and Council of the Americas on economic policy priorities across the Americas.
  
The Australian dollar continued to trade in a narrow range against the U.S. currency overnight after easing off a fresh 10-year high late last week. The strength of the currency has been underpinned by speculation Australia's central bank will increase interest rates by 25 basis points to 6.50 percent as early as April after it warned last week the outlook for inflation was higher than ideal.  

The New Zealand dollar rose to a 22-month peak against the U.S. dollar on Tuesday, supported by investors' renewed appetite for risk via the seemingly ever-increasing level of interest rates in the country.
   
The Mexican peso weakened sharply in early trading overnight - trailing Mexican equities - as concerns mounted about the health of the economy in the United States, Mexico's main trading partner. The benchmark IPC stock index fell 1.04 percent to 27,867 points after a major U.S. home builder abandoned its 2007 earnings forecast and a measure of U.S. consumer confidence fell more than expected in March.

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