NEWS / Foreign Exchange

Euro Turns Higher as German Unemployment at Lowest Level in 5 Years

Talking Points

??? New Zealand Dollar: CA shrinks significantly as export prices surge
??? Euro: German unemployment lowest in 5 years
??? British Pound: Lending stays in range
??? US Dollar: GDP and PCE on tap

Euro Turns Higher as German Unemployment at Lowest Level in 5 Years

The euro slowly churned higher in early European trade as good news on both employment and consumer fronts brought buyers out of the woodwork. The pair sold off hard yesterday, following Fed Chairman Ben Bernanke??™s testimony before Congress. Dr. Bernanke maintained a resolutely hawkish posture underlining that inflation rather than economic slowdown was the greater risk to US monetary policy. The greenback therefore gained ground on the assumption that the Fed will not lower rates even in the face of deteriorating US economic fundamentals. With oil at $64/bbl and gasoline prices in California already above $3/gallon the Fed faces a terrible dilemma as it must assert control over the budding inflationary pressures and at the same time stimulate consumer demand which will undoubtedly suffer due to the spike in energy costs.

Meanwhile in the Euro-zone the economic news continues to surprise to the upside as growth in world??™s second largest economy decouples from the US slowdown. German unemployment hit a five year low with rolls reduced by ??“65K from ??“43k expected while the retail sector also performed better rebounding to 53.4 from 49.8 the month prior. The bounce in retail indicates that EZ consumer demand may be finally picking up as the job picture on the Continent improves materially.

Ironically enough Dr, Bernanke based his relatively upbeat prognosis for the US economy on the assumption of strong performance from EZ and Asia. 2007 may well mark the moment when those two regions begin to drive global demand while US economy takes a back seat. The net result of such a scenario is that US economy may experience only a soft landing, but the dollar is likely to see further weakness nevertheless.