NEWS / Foreign Exchange

The U.S. dollar edged slightly higher against the major currencies this morning

The U.S. dollar edged slightly higher against the world??™s major currencies this morning, as a rally in U.S. equities and dealers evening out their positions before the weekend provided support for the currency. America??™s currency has remained on its back foot throughout most of the week amid expectations for strong economic growth in Europe and the outlook for interest-rate increases in the region. Markets now look to schedule commentary from U.S. Treasury Secretary Henry Paulson who is due to speak on issues between the United States and China. Federal Reserve Board Governor Frederic Mishkin is also due to speak. Expect the dollar to maintain its defensive stance through out today??™s session.

The Euro approached a two-year high against the dollar overnight before reversing course as U.S. benchmark indexes rallied this morning. The European currency also rose against the yen, having hit a record peak of 162.42 this week. The single has also been boosted by prospects of narrowing interest rate differentials with the United States as the region's robust growth and inflation pressures will probably prompt the European Central Bank to raise rates again in June. In contrast, the Federal Reserve is widely expected to cut rates at least once this year, from 5.25 percent. European officials renewed attempts to curb the euro's relentless rise against the dollar and yen via official commentary overnight, despite an absence of public support from Washington and Tokyo. European Central Bank President Jean-Claude Trichet repeated a warning to currency traders that they could get burned betting one way and he sought to dispel the idea that the United States and Japan were happy with their weaker currencies. Trichet and Jean-Claude Juncker, representative of euro zone finance ministers, said Japan too had made it clear in public and private that exchange rates should reflect Japan's strengthening economy. The comments had little immediate or lasting impact on Europe??™s single currency.
   
The British pound traded below $2 overnight after data showed British retail sales growth dipped in March, but quickly bounced back as the figures did not alter expectations for higher British interest rates. UK retail sales rose 0.3 percent in March, less than the forecast for a 0.5 percent rise. However, the retail sales deflator, a gauge of retail prices, rose at its strongest rate in six months.  With evidence of rising price pressures, reflected in this week's data showing inflation at above 3 percent, investors still expect the Bank of England to raise rates in May and probably again later this year, provided broad support for the currency.
  
The Japanese yen maintained its broad weakening trend overnight, taking its cues from events in other markets as G7 central banks stand to increase interest rates in the near term.  With Japanese benchmark interest rates standing at just 0.5 percent, and seen rising only very gradually, the yen is a favorite funding currency for carry trade investments in higher return units.

The Chinese yuan closed lower against the dollar on Friday as market expectations of a quicker pace of yuan appreciation, fuelled by the prospects of an interest rate hike, were dampened when the central bank set a weaker mid-point. On the data front, China's consumer prices rose 3.3 percent from a year earlier in March, the National Bureau of Statistics said on Thursday, confirming a rumor that had swirled in the market for more than a week and sparking speculation that the central bank would soon raise official interest rates again after an increase in March. An interest rate hike would narrow the current gap of 2.46 percentage points between China's one-year yuan deposit rate and the one-year U.S. dollar LIBOR, inviting speculative fund inflows that would add pressure for the yuan to rise.
   
The Canadian dollar rallied toward its 5-1/2 month high versus the dollar this morning due to better-than-expected domestic retail sales data and higher commodity prices. The domestic currency was enjoying modest gains as higher prices for oil and gold helped spark commodity-drawn interest in the currency, but the retail sales figures helped lift it comfortably across the board.  Canadian retail sales rose 0.1 percent in February from January, which topped expectations for a 0.1 percent drop, as higher prices for gasoline and fresh produce offset a sharp drop in new vehicle sales.
   
The Australian dollar rebounded on Friday from a broad sell off of high yielding currencies, but gains were checked ahead of domestic data due next week that could give clues on whether interest rates will rise. Data released on Friday showed new motor vehicle sales rose 1.0 pct in March from the previous month and were 11.2 percent higher than the same month a year earlier. Other figures showed the recent surge in the Australian dollar and lower oil prices during the March quarter helped ease pressure on import prices. They fell by a faster-than-expected rate of 1.7 percent and would help take some of the heat off of domestic inflation. AUD also recovered against the Japanese yen, rising to as high as 99.21 yen from a low of 97.37 yen in offshore trade, helped by recovery in regional stock market which saw investors' appetite for carry trades restored.
   
The Mexican peso gave back some if its recent gains, as US equities rallied.

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