NEWS / Foreign Exchange

Trading in currency markets generally has been very quiet

The 7% drop in the Chinese stock market on Wednesday, which was sparked by the government's decision to raise the transactions tax on stock trading, has had little impact on other financial markets. The S&P 500 closed at an all-time high yesterday, and the Chinese stock market rebounded 1.4% last night. Most other Asian equity markets rose 1% to 2% last night, and European bourses are generally higher as of this writing. Share prices continue to rise because the outlook for global economic growth generally remains favorable. Data released last night showed that capital spending in Australia remains very strong. Although the German unemployment rate ticked up in May, the unemployment rate in France dropped to a 24-year low last month.

Trading in currency markets generally has been very quiet, and most major dollar exchange rates are little changed relative to 24 hours ago. Perhaps the economic data releases that are on the docket over the next two days will provide some direction. Today's lineup includes revised GDP data for the first quarter, the weekly series of initial jobless claims, and the Chicago PMI. Tomorrow's highlights are the employment report for May, and the ISM manufacturing index. U.S. bond yields have risen and the dollar has strengthened somewhat over the past few weeks as U.S. economic data generally have been stronger than expected. Indeed, a few weeks ago most market participants looked for the Fed to start easing policy later this summer, and for rates to fall by 50 to 75 basis points by the end of the year. Today, that expectation is down to 25 basis points (at most) by the end of the year. Expectations of easing will fade even further if data over the next two days are strong. In that event, the greenback likely would appreciate. However, weaker-than-expected data likely would weigh on the dollar.