USD Reflects Uninspiring U.S. Data

The U.S. dollar kept under pressure overnight, slumping to another two-month low against the euro and a basket of six major currencies.
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The U.S. dollar kept under pressure overnight, slumping to another two-month low against the euro and a basket of six major currencies as the bulk of U.S. data this week backed growing views of a cooler pace of recovery. The greenback also extended its slide against the yen, falling to its lowest level since early December.

Despite its overall heavier tone, the dollar managed to firm off yesterday's 2-1/2-month low against sterling. The single currency's rise to a 1-1/2-month high against the U.K. currency helped the dollar's rebound against the pound. Worries about the U.S. growth outlook largely hurt the growth-sensitive currencies of Australia, Canada and New Zealand.

The Canadian dollar fell to its lowest in a week against the dollar as U.S. economic weakness somewhat clouded the outlook for the Canadian economy, which sends about 75% of its exports to its U.S. neighbor. Still, the loonie's downside should be cushioned by its favorable interest rate outlook. Odds also favor a rate hike in Canada next week to 0.75% from its present level of 0.5%.

For the latest on the U.S. economy, investors on Friday morning will study indicators on consumer inflation, capital flows and consumer sentiment.


: The euro continued its upward advance against the greenback, strengthening to a fresh May 10 peak. Since its tumble in early June to its lowest in over four years, the single currency has rebounded more than 9% against the buck. Some of the common currency's recovery has been facilitated by thinner summer volumes, which can exacerbate market movements.

Nevertheless, investors are also increasingly feeling less worried about the bloc's debt struggles. Government debt auctions recently in Greece, Portugal and Spain -- the epicenter of the crisis -- went off relatively smoothly, providing the main catalyst that helped to bolster the single currency this week. A sense that U.S. economic fundamentals are weakening have acted as a tailwind for the euro, giving it added lift.

The euro was little changed by data that showed the euro zone unexpectedly recorded a euro 3.4 billion trade deficit in May. Investors had expected the bloc to post a smaller euro 1.5 billion surplus following the euro 1.8 billion one in April.


: The Swiss franc pared its gains after rising yesterday to a 5-1/2-month peak against the U.S. dollar. In addition to broad dollar weakness, the Swiss currency has benefited from contrasting economic fundamentals between Switzerland and the U.S.

Interest rate differentials have also support the franc with its 0 to 0.75% target range rate compared to comparable U.S. yields closer to zero. Most investors also expect that the Swiss central bank will boost interest rates before its U.S. rival, a favorable scenario that would increase the franc's yield advantage.


: Leading indicators in Canada rose by 1% in June, which was better than the 0.7% forecast. The previous month's report was revised to +1.1% from +0.9%. The report is a forward-looking indicator of economic prospects. The better-than-expected data should increase the odds of a Bank of Canada interest rate hike to 0.75% from 0.5% next week on July 20. Although most investors see a BOC rate hike this month, they are less certain on the pace of monetary tightening going forward, which could somewhat restrain the loonie's upside in coming sessions.


: The U.S. consumer price index unexpectedly declined by 0.1% (m/m) vs. expectations for an unchanged (0.0%) reading in June. The fall in June marked the third straight month consumer prices have declined. The core CPI, which backs out the volatile food and energy sectors, rose by 0.2% (m/m), which was a touch above the 0.1% (m/m) increase investors had forecast. Core consumer prices on the year rose exactly as expected, climbing 0.9%, the same level as the previous month. Overall, today's CPI should not add materially to recent concerns that a bout of deflation is imminent. The dollar firmed off the seven-month low it had hit against the yen in overnight trading.