Stronger Economic Data Keeps Euro Near its Highs (page 1 of 2)

DailyFX Fundamentals 04-14-08

By Kathy Lien, Chief Strategist of DailyFX.com

Even G7 and Retail Sales Can't Help the US Dollar

The US dollar has strengthened against all of the majors but the degree of strength is marginal considering the changes in the language of the G7 statement and the better than expected retail sales report. The main reason why the dollar did not rally as much as it could have is because with both reports, there is more than meets the eye. Even though the G7 is worried about the outlook for the global economy, the stability of the financial market and the volatility in currencies, the price action in the FX markets suggest that traders and investors believe that the G7's words do not pack much punch. More specifically, the G7 called for more self-regulation by investment banks, which the banks balked at. They are also contemplating higher capital requirements for the banks but this would be only to prevent a future financial crisis rather than solving the present one. If such a rule was to be instituted today, it could make the capital markets even more illiquid. As for retail sales, even though the headline numbers increased more than expected, meaning that consumer spending did not contract for the second consecutive month, if gasoline was stripped out of sales, consumer spending was actually flat. Gas prices have increased 11 percent this year, taking a bigger bite out of the pocketbooks of US consumers. Inventories on the other hand have increased 0.6 percent while car sales have been the weakest in 10 years. It is difficult to believe that economy is improving as indicated by the headline retail sales figure when the nation's fourth largest bank Wachovia posted a $393 million loss and cut its dividend. More banks will be reporting earnings this week and it will be important to see if the losses continue to build. In the corporate sector, survival has become the biggest focus. The potential for a merger between Delta and Northwest as well as Blockbuster's bid for Circuit City stems from the need to reduce costs or to save an otherwise floundering business. Meanwhile the market's focus tomorrow will turn to inflation and manufacturing. Strong inflationary pressures are practically a given, but a turn in manufacturing is up in the air. The market is looking for dollar weakness to boost production, but that was not the case in the month of March even though the dollar had weakened that month as well.

Stronger Economic Data Keeps Euro Near its Highs

The Euro sold off aggressively when the market opened Sunday night in reaction to the changes to the G7 statement. However those losses were recuperated throughout the late Asian, early European trading session. Unlike US economic data, Eurozone economic data was strong with no glaring underlying weakness. Growth in France, Germany and Spain continued to increase, albeit at a slower pace while growth in Italy contracted. Even though these numbers tell us that the Eurozone is beginning to slow, the problems are not as bad as the ones in the US and rather than repeated disappointments (even if they are beneath the headlines), there are still positive surprises. In addition, the European Central Bank continues to be very hawkish with ECB member Mersch telling us that there is no room to cut interest rates this year and ECB member Noyer indicating that there is no contradiction between price stability and growth. Unless the ECB changes their stance or economic data slows materially, any corrections in the EUR/USD may be limited.