The U.S. dollar rallied this morning after the National Association of Purchasing Management Chicago business barometer accelerated to 61.7 in March from 47.9 in February and an unexpectedly sharp rise in consumer spending. Yesterday, the greenback was supported by news that 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%, above forecasts for 2.2%. Fed Chairman Ben S. Bernanke spoke yesterday, but his comments contained no reference to possible interest rate cut, which some analysts were speculating as early as second quarter. Fed members are still concerned about inflation as core inflation for February came in higher than expected.
Meanwhile, the Japanese yen plunged, pausing two days of gains, on speculation that investors returned to buying riskier assets. News that Japanese retail sales unexpectedly fell 0.2% in February due to warm weather curbing demand for heating oil, dampened hope for any near-term rate hike in Japan. The yen may weaken further should Japanese investors start buying foreign bonds as the new fiscal year begins in April. Low interest rates encourage investors to borrow money in Japan to invest in higher-yielding assets overseas.
The Euro is trading softer, dented by a stronger U.S. dollar. Yesterday, the euro gained above $1.3330 after German unemployment rate dropped to 6.9%, the lowest level in over five years. The euro remains supported by comments 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 British pound fell below $1.96 on merger and acquisition activity this morning. U.K. consumer confidence in March met expectations, and had no impact on the pound. The Bank of England will meet next Thursday to discuss interest rates. Interest rates are expected to remain unchanged at 5.25%. However one more rate hike is expected by year-end.
The Canadian dollar gained, supported by corporate flows from merger activity, higher gold prices and a rise in oil prices above $66 a barrel. News that its domestic economy grew only 0.1% in January, down from 0.4% in December, dented the currency slightly.
The Australian dollar is trading in a narrow range ahead of next Wednesday??™s Bank of Australia??™s central bank meeting where interest rates may be raised. Before the RBA??™s announcement on Wednesday, the market will eye Monday??™s February retail sales and home building approvals data for clues on the strength of the domestic economy.
The New Zealand dollar is trading steady, despite a soft growth data. Gross domestic product grew only 0.8% in the first quarter, below forecasts for a 1% expansion. Despite softer growth data, the central bank is expected to keep its tightening bias as robust domestic spending keep central bankers on edge over inflation worries. A rate hike to 7.75% is expected in April or June.
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