NEWS / Foreign Exchange

The U.S. dollar staged a broad rally this morning

The U.S. dollar staged a broad rally this morning after a final data revision showed the U.S. economy grew more strongly than expected in the fourth quarter of last year. U.S. fourth quarter gross domestic product (GDP) grew 2.5 percent, based on the final reading, higher than median economists' forecasts of 2.2 percent. In other news, the number of U.S. workers filing new claims for jobless benefits dropped unexpectedly last week to the lowest level in more than two months. The data combination suggested the U.S. economy was more resilient than many initially thought, and supported market expectations that the Federal Reserve may keep interest rates on hold for some time.
     
The Euro took its cues from the US dollar??™s data releases this morning, while receiving some support from official commentary pointing to the possibility of higher EU interest rates. European Central Bank (ECB) President Jean-Claude Trichet - speaking at scheduled conference - stated that EU interest rates are moderate and on the accommodative side, but that the central bank will not be complacent on inflation dangers, pointing to the possibility of higher interest rates in the distant future. The ECB has lifted its key interest rate seven times to 3.75 percent since December 2005 and most analysts expect another increase to 4 percent in June. Trichet also stated that an orderly slowdown in real estate markets was welcome in euro zone countries which have experienced fast property price growth, and that the latest economic data supported the ECB's economic outlook.
   
The British pound steadied off its recent lows as a global recovery in risk appetite prompted investors to buy the high-yielding pound. Data released overnight showing a surge in retail sales and an unexpectedly big rise in British mortgage lending help offset a negative impact from news of a record British current account deficit and a dovish house price survey. A survey by the Confederation of the British Industry showed retail sales volumes rose at their fastest rate in more than two years this month, and twice as fast as expected. Last night??™s data releases reinforced the market??™s view that the Bank of England would raise interest rates again in the next few months, but the currency??™s near-term performance will be closely tied to investor risk appetite.
        
The Japanese yen retreated from sharp gains posted yesterday against the dollar, as US data drove the low yielding currency back to lows seen earlier this week. Investors have also re-entered risky carry trades, which involve borrowing the low-yielding yen to fund purchases of other assets with higher interest rates such as the Australian and New Zealand dollars.

The Canadian dollar weakened slightly this morning as commodity prices turned lower and U.S. data gave a boost to the America??™s currency, while the market awaited comments from Bank of Canada Governor David Dodge later in the session. The resource-linked Canadian currency was dragged lower by a combination of oil prices that slipped below $64 a barrel and gold prices that eased off a four-week high. Canada??™s currency is expected to trade within its current range until Dodge speaks at an economic conference in New York at 10:15 p.m. PST. The event will be followed by a press conference which the market will monitor for any indication on whether the Bank of Canada has altered its outlook for the Canadian economy. Markets now look to Friday??™s release of January economic growth data, as well as February raw materials and wholesale prices for near-term direction.
   
The Australian dollar traded slightly higher overnight, buoyed by gains on the cross rate against the yen and speculation Australia's central bank might raise interest rates as early as next week. The Aussie/yen cross peaked near 94.66 yen overnight, after having fallen as low as 93.75 yen in early offshore trade when investors trimmed riskier bets such as yen carry trades. Markets will now turn to private-sector credit data on Friday and then February retail sales, building approvals and trade balance data next week for clues on the strength of the domestic economy before the central bank's announcement next Wednesday.
   
The Mexican peso regained some of its previous losses this morning, spurred higher by positive US data and a rally in Mexican equities. The benchmark IPC stock index rose 0.85 percent to 28,339 points, while the peso currency firmed 0.2 percent near 11.0475 per dollar. Mexico sends nearly 90 percent of its exports to the United States, and the IPC index closed lower the last three days on worries over the performance of the U.S. economy.

Indicative Rates: