Forex – Dollar weathers dip in US retail sales

LONDON (AFX) – The dollar weathered news that headline US retail sales fell in June with some focus also doing to upward revisions to the figures which strip out the volatile car sales numbers.

US retail sales fell 0.1 pct in June, dragged lower by a 1.4 pct drop in
automobile sales. If the latter were to be stripped out, retail sales in June
rose 0.3 pct.

Steve Pearson at HBOS said while the headline figure was disappointing, the
core figure helped the dollar.

"There has been an underlying bid to the dollar," he said.

There was knee-jerk dollar selling after the news but the pressure faded

"Overall, the headline data is weaker than expected, although upward
revisions to the core reading mean it is arguably in line with expectations,"
said Mike Carey At CALYON.

"Still, with the Fed continuing to monitor incoming data, this release will
add to the sense that the soft landing has already begun," he pointed out.

Underlying consumer spending is expected to be weak in the second quarter,
reinforcing expectations that the US economy is cooling. However, as the latest
spike in oil prices, indicates, the risks on the inflation front are ever

Oil prices hit fresh all time highs above 78 usd a barrel today amid
escalating tensions in the Middle-east sparked by Israel’s aggressive military
attack on Lebanon. Currencies which investors turn to in times of trouble, the
Swiss franc and the pound, also benefited.

Earlier today, the Swiss franc and the pound hit 23 and 18-day highs
respectively against the euro.

Elsewhere, the yen held steady after the Bank of Japan ended its zero rate
policy overnight.

The Bank of Japan unanimously voted to raise its overnight lending rate to
0.25 pct from zero. It also raised the official discount rate to 0.4 pct from

The central bank sought to calm market expectations for further rate hikes,
however, by saying that it will keep interest rates at "very low" levels for the
time being, implying that it would not rush the second increase.

"In terms of impact on the yen the decision has been very well flagged and
market does not appear to be distressed or confused about the rate outlook,"
said UBS currency analyst Benedikt Germanier.

"The bias recently has been for the yen to weaken, and there is no clear
catalyst of a much stronger yen for now," Germanier added.

The yen reacted little to the news, continuing to trade around the 115.70
per dollar level that was seen prior to the rate announcement.

Some analysts, however, believe that investors may be underestimating the
chances of more rate hikes in Japan.

Julian Jessop at Capital Economics pointed out that the central bank’s own
projections for growth and inflation look tame.

"These projections look unambitious, implying that interest rates will
continue to rise," he said.

He argued that markets are complacent about the upside risks to Japanese
interest rates, drawing parallels with both the US and the euro-zone when they
first started tightening monetary policy from lows of 1 pct and 2 pct

"This helps to put today’s reference to ‘maintaining an accommodative policy
environment’ in context. Similar language from the Fed at the outset of its
tightening cycle has not prevented US rates from rising to 5.25 pct, with the
possibility of more increases to come.

"The chances that Japanese rates ultimately rise to 3 pct or so are much
higher than the chances that the Bank of Japan lifts rates just one or two more
times and then goes back on hold," said Jessop.

Among other currencies, the Australian dollar earlier fell to several-day
lows against its US counterpart following disappointing trade data overnight
which showed a massive deficit of 2.27 bln aud in May, well above the 1.30 bln
shortfall expected.



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