Dollar Resumes Uptrend After Retail Sales Booster

USD

The dollar rose on Wednesday, after February Retail Sales showed a surge of 1.1% when only a rise of 0.5% had been expected. This continued to support the current positive outlook for the U.S economy which has been fuelling the recent rise in the greenback. Retail Sales Ex Autos also increased by 1.0% versus 0.5% forecast; other data showed the Import Price Index rise by 1.1% from 0.6% previously when it was just expected to remain unchanged. January Business Inventories showed an increase of 1.0% from 0.3% previously. Overall, the dollar was also supported by a continued optimism for the housing sector which is in the process of making a revival and tends to lead the rest of the economy in most major economic recoveries.

EUR

The euro weakened on Wednesday, after disappointing Italian bond sales showed lower demand and a higher risk premium, reflecting underlying unease about the country's uncertain political future. Fitch's downgrade to BBB+ and a negative outlook also no doubt weighed and revived the spectre of another peripheral debt crisis. At the sale, a total of 5.32bn in 3 and 15 year bonds were sold, with the 3-years' achieving a 2.48% yield versus the prior month's 2.30% and the 15 year bonds for 4.9% from 4.805% previously. Demand lessened with bid-to-cover at 1.28 times versus 1.37 times previously. The spread of Italian over German bonds is showing a reversal at the bottom of its channel, which points to a further widening of the spread and a probable rise in yields.

GBP

The pound recovered on Wednesday, after negative expectations concerning the outcome of several major events scheduled for next week helped provide some support to the currency. The chancellor of the exchequer will be revealing his budget on Wednesday March 20. While there were fears of more austerity and cuts, which according to estimates could shave 2.0% of growth and lead to further weakness in the pound, some are now speculating the chancellor could delay the cuts that would probably help lift sterling. Also on Wednesday, the minutes of the last BOE rate meeting will be released with expectations pitched quite low after the previous meeting saw 3 of the 9 vote for more stimulus. Expectations of more negative data may be overdone too, and if some major figures show a recovery that could help sterling. The risks to the downside are still substantial, mainly due to the deteriorating outlook for Europe which is closely tied to the U.K through trade links, and further weakness in the euro will probably spell the same for the pound.

JPY

The yen recovered on Wednesday as a result of the improved yield differential between U.S and Japanese bonds after U.S Treasury yields fell as a result of an improved outlook for the American economy. This lessened the use of the yen as a sell currency in the carry trade. The yen also rose, due to uncertainty over whether Kikuo Iwatawill be successfully voted into the BoJ office after the opposition DPJ party said they would be voting against him, as he wants to change the law governing the BOJ which they regard as an infringement on the central bank's independence. With two of the minor party's having now said they will vote for Iwata, it leaves the government only one vote short of the majority, and he is expected to scrape through at the vote in the upper house on March 15th which may lead to renewed yen weakness.