Dollar Continues to Retrace Earlier Gains of 2012

September 12, 2012

Germany’s Federal Constitutional Court gave a conditional green light to the permanent EU bailout fund, the ESM, and to a new fiscal pact.  This ruling removes a major impediment to the Draghi plan.  The ESM will be functional October 8.  The court said Germany’s contribution to the ESM cannot exceed EUR 190 billion without getting approval from the lower and more powerful house of German parliament, the Bundestag, and that both houses in the future need to be informed of any decisions affecting the ESM.

Spreads between Spanish and Italian sovereign yields and German bunds narrowed further in response to the German court ruling.  Yields on German 10-year bunds and British 10-year gilts are ten and eight basis points higher.

The dollar has fallen 0.5% against the euro and Aussie and New Zealand dollars.  The greenback also lost 0.4% against the Swiss franc, 0.3% relative to the British pound, and 0.1% versus the yuan.  The loonie is steady, and dollar/yen firmed 0.1% after more verbal intervention from Japanese Finance Minister Asumi.

The euro’s high today of $1.2938 represents a 61.9% reversal of its intra-2012 losses from a peak of $1.3490 on February 24th to a low of $1.2040 four months later on July 24.  $1.2938 was the euro’s strongest level since May 11.

Gold and oil prices increased by 0.7% apiece overnight to $1747.20 per ounce and $97.84 per barrel.

Polls suggest that a Socialist-dominated coalition will win today’s Dutch national election.  This would be further good news for the euro, because opposition parties have been hostile to the common currency.

Stocks in Europe have risen by 1.0% in Spain and Italy, 0.8% in Germany, 0.6% in France but just 0.2% in Britain.  In the Pacific Rim, share prices advanced by 1.7% in Japan, 1.1% in Hong Kong, 0.8% in Australia, and 0.5% in India and New Zealand, but equities lost 0.6% in China, 0.4% in Malaysia, and 0.2% in Thailand and South Korea.

There are several central bank policy meetings scheduled for tomorrow, most notably at the Federal Reserve where hopes are elevated that a resumption of quantitative easing may be decided.  Even more likely, the projected onset of interest rate tightening may be moved deeper into the future.  Other central bank decisions are awaited in Switzerland, New Zealand, Indonesia, and South Korea.  There is some speculation that Swiss authorities could ratchet the franc’s permitted euro ceiling down a centime or two.

Japan’s tertiary index, a gauge of service sector activity, fell 0.8% on month in July.  Such was 0.4% lower than the 2Q average level and just 0.8% higher than a year earlier. 

Core machinery orders in Japan, a leading indicator of future business investment, rose 4.6% in July following a 5.6% rebound in June after a 14.8% plunge in May.  July’s increase was about twice as much as forecast but left the level still 1.2% weaker than the 2Q12 mean.  Meanwhile government machinery orders sank 13.5% in the latest month, and foreign orders for machinery rose just 3.0% following a 9.8% drop in June.

Japanese domestic corporate goods prices rose 0.3% last month, the first increase in five months, and were 1.8% lower than in August 2011.  Export prices and import prices were respectively 2.6% and 4.8% below year-earlier levels.

The Bank of Japan’s balance sheet continues to swell, reaching JPY 152.6 trillion on September 10 versus JPY 150.0 trillion at end-August and JPY 143.6 trillion at mid-2012.

Australian consumer confidence improved 1.6% in September, partially reversing August’s 2.5% drop but printing below 100 for the seventh straight month.  Aussie housing starts increased 4.6% in the second quarter, more than twice as much as forecast. 

Industrial production in the euro area continued to see-saw in July, rising 0.6% following June’s decline of 0.6%.  Production was 2.3% lower than a year earlier.  Both the on-month and on-year changes were better than expected.  July’s level was 0.5% greater than the 2Q mean.  In the year to July, output fell by 7.3% in Italy, 5.3% in Greece, 5.4% in Spain, 3.3% in France, and even 1.7% in Germany.

The rise last month in German consumer prices was revised 0.1 percentage point upward to 0.4%.  On-year CPI inflation of 2.1% was above July’s 1.7%.  Energy was the main factor behind this acceleration.  Non-energy consumer prices were steady versus July and just 1.4% higher than a year earlier.

French consumer price inflation also climbed in August, reaching 2.1% versus 1.9% in July.  The core CPI 12-month increase was just 1.3%, however.  France posted a EUR 2.5 billion current account deficit in July, smaller than June’s EUR 4.8 billion imbalance.

Italian industrial production fell 0.2% in July and was 7.0% lower in January-July than a year before.  Finnish retail sales were 3.8% higher in July than a year before.  Portuguese CPI inflation rose to 3.1% in August from 2.8% in July.  Spanish CPI inflation accelerated a half percentage point to 2.7% in August.

Better-than-assumed British labor statistics were released.  The claimant count of unemployment dropped in August by 15K on top of a 13.6K decrease in July, and the associated jobless rate slipped to 4.8% from 4.9%, where such had hovered for many months.  The ILO-basis unemployment rate rose, in contrast, to 8.1% from 8.0%.  On-year wage inflation in the three months to July eased to 1.5% from 1.8%, including bonus pay, and firmed to 1.9% from 1.8% excluding such.

The Conference Board reported that Britain’s index of leading economic indicators edged 0.1% higher last month, and the index of coincident indicators climbed by 0.3%.

India had another soft industrial production report.  Output fell by 0.2% in July and was merely 0.1% higher than in July 2011.

South Korean unemployment stood at just 3.1% on a seasonally adjusted basis last month.

The U.S. ambassador to Libya has been killed.  Scheduled U.S. data releases today are monthly import prices and wholesale inventories as well as weekly mortgage applications. 

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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