By: Terry Allen
The dollar finished, an otherwise strong week, by declining against most of the other major currencies on Friday after the disappointing releases of a widening US Trade deficit and falling US consumer sentiment figures.
In detail, the US trade deficit widened by an unexpectedly large 18.2 percent, the most in more than 10 years, whilst US consumer sentiment numbers fell to 66.0 from 70.6 in October, the lowest since August and well below economists' median expectation of 71.0.
The U.S. trade deficit seems to have increased as a consequence of rising imports from China and climbing oil prices.
Although the dollar index finished higher than its 2009 lows, it did, in fact, record weekly losses of 1.5% versus the AUD and 2% versus the CAD and NZD.
On Friday, an increase in risk appetite forced stocks to climb resulting in further pressure on the negatively correlated USD and YEN. In addition, most analysts were in agreement that the widening US Trade Gap and falling consumer sentiment implied that the Federal Reserve would have to keep interest rates on hold for the foreseeable future.
These concerns over the US economic recovery were central to Friday’s USD bailout. The consensus of opinion was if the U.S. trade deficit widened in an environment when the dollar has been very weak then this was not good for growth.
Further statements advised that the US could remain a major importer of capital and that an economic recovery may need a larger national financing requirement.
On Friday, the Euro-zone surprised the market by registering only a Q3 GDP growth of +0.4 against the expected +0.5. Consequently, the Euro fared badly against all the majors except the USD. There is speculation than the lower growth rate was caused by consumption still being low as the services PMI did not rise above 50 till September.
There were no major UK fundamental news releases on Friday letting the GBP rise against most of the majors except the AUD, NZD and YEN.
The first major event risk next week is the release of the US retail sales figure and the retail sales index, excluding cars, by the US Commence Department at 8.30am EST Monday.
The retail sales figure is expected to climb by 0.9% for October whilst the index is predicted to rise by 0.4%. There are concerns, however, that the retail sales index result may be disappointing after the recent poor consumer confidence reports.
Later on Monday at 12.15 EST, Federal Chairman Ben Bernanke will address a New York audience about the US economic outlook. If his comments mirror those of other recent key speakers, then this would confirm that interest rates will remain on hold for some time.
In particular, the general consensus of other Fed speakers was that it was far too soon to suggest a possible rake hike in 2010. As a consequence, the US dollar could weaken substantially if Bernanke was to indicate likewise. However, if instead he raised concerns about the US economic recovery then risk aversion could result favoring the safe-haven dollar.
There are no highly rated economic releases from Euro-zone during next week. However, GBP event risks will pick up on Tuesday when the UK’s consumer price index (CPI) reading for the month of October is expected to rise 0.1 percent.
More importantly, the annual UK rate of growth, which is closely monitored by the Bank of England, is forecasted to rise to 1.4 percent from 1.1 percent. If this was the case, then this figure would keep inflation within the central bank’s acceptable range of 1 percent to 3 percent and below their 2 percent target.
Serious GBP movements should be expected if these numbers differed, in any way, from those predicted.
Barrack Obama’s first Asian visit could also impact the currencies markets especially if any pressure is placed on countries, such as China, to let their currencies rise.