Weekly FX roundup: Dollar drops as stocks climb

Hussein Sayed, Financial Analyst, ACM Middle East & Asia

US ISM manufacturing index improved from 52.6 to 55.7 - its highest level since April 2006. This had a positive impact on the equity markets and put some pressure on the US Dollar. However, the real influential factors last week were not the economic data releases, but the central bank meetings in four major regions, Australia, Euro Zone, UK, and US.

Starting with the US, the FOMC on Wednesday left rates unchanged at 0%-0.25% and did not change its commitment to keep rates low for an 'extended period' of time. All major currencies jumped against the dollar to their highest levels since the beginning of the week, with the Aussie dollar topping the list of gainers.

The inverse correlation between the greenback and risk appetite is likely to continue as the Fed has no willingness to raise rates anytime soon.

On the data front, the US economic calendar is on the light side in the week ahead. No data releases expected on Monday, while the NFIB Small Business Optimism Index and USD IBD/TIPP Economic Optimism Report are due for release on Tuesday. Thursday features the initial jobless claims, oil inventory numbers and Monthly Budget Statement for October.

Friday ends the week with the University of Michigan Consumer Sentiment Index for November and September Trade Balance which may show a wider deficit, reaching -$31.8bn from -$30.7bn.

Euro holds six-month gains

The EUR/USD managed to hold on to its gains since March, ending the week at 1.4844. As expected, the ECB also kept interest rates unchanged at 1%, saying the current levels are appropriate. Meanwhile, President Trichet said that the stimulus policies will be phased out gradually.

An ECB statement also highlighted a growing optimism saying the 'latest information continues to signal an improvement in economic activity in the second half of the year and economy in the Eurozone is expected to recover at a gradual pace in 2010.'

On Monday, Eurozone finance ministers will gather for a regular monthly meeting which will continue until Tuesday. Like last month, the strength of the Euro would most likely be on the agenda, as exporters voice their apprehension about the Euro's strength against the dollar.

Economic calendar in the Eurozone is a bit busier than the US, starting on Monday with releases of the EuroZone Sentix Confidence and German Industrial production data. The German and Eurozone ZEW surveys are expected on Tuesday, while the Eurozone Industrial Production data are due on Thursday. Friday rounds out the week with Eurozone Q3 GDP, which is expected to gain a modest 0.5%.

Sterling strengthens

The British Pound had a strong week and was among the top performing currencies, rising 1.2% against the dollar and ending at 1.6610. The BoE kept the interest rate at 0.5% and expanded its Quantitative Easing programme by £25bn to £200bn.

Yet the pound rallied as markets forecast a £50bn increase. Whether or not the Sterling can continue its recent gains may depend on the coming week's unemployment numbers, due on Wednesday.

Other key data and events to watch out for next week would be the BRC Retail Sales Monitor and Trade Balance on Tuesday, while Wednesday brings the Bank of England Quarterly Inflation Report along with unemployment figures.