U.S. Dollar Gains, Fades on Initial Jobs Data, Then Firms

Heightened risk aversion and fear of continued global economic weakness in the U.S. and a move toward austerity in Europe helped firm the U.S. dollar on Wednesday. Positive initial job claims released on Thursday morning provided a slight morning reversal.

Wednesday’s plunge in new-home sales and the Federal Reserve’s gloomy economic report had investors moving into dollars as a safe haven play as risk appetite dwindled yet again.

New Homes, Durable Goods Beat Expectations

New-home sales for May fell by nearly one-third from April to the lowest level ever recorded, an annual rate of 300,000 according to the U.S. Department of Commerce. Sales fell 18.3 percent compared with a year ago.

Uncertainty about the ongoing sovereign debt crisis in the euro zone is also driving aversion to risk assets. The lack of certainty is driven largely by a lack of consensus among euro zone countries on how to create a strong and sustainable economic recovery. If economic headwinds are in focus, the U.S. dollar generally outperforms other currencies.

The U.S. Department of Labor released initial jobless claims at 8:30AM (EST) this morning. The result surprised analysts, falling 19,000 last week to a seasonally adjusted 457,000 level. This was the lowest level in six weeks and beat expectations of 465,000 initial claims.

On the manufacturing front this morning, the U.S. Commerce Department said orders for durable goods dropped in May, sinking 1.1 percent on weaker demand for airplanes, steel and communications equipment. This was viewed as mildly positive on expectations for a 1.4 percent decline.

Currency Reaction

The U.S. dollar index, which tracks the dollar’s performance against a trade-weighted basket of six major currencies, was at 85.71  before the open of U.S. equity markets versus 85.96 ahead of the job claims and durable goods data. The index had risen as high as 86.00 yesterday.

The euro is trading at $1.2289 compared to $1.2268 ahead of the data, The euro rebounded marginally higher following the somewhat positive U.S. durable orders and initial claims data results.

The British pound extended the week’s gains, supported by a Tuesday announcement of the new government’s emergency budget to reduce spending and cut the U.K. budget deficit. The British pound rose as high as $1.5011 and is trading at 1.4993 before the open of U.S. equity markets.

The Australian dollar tripped below 0.867 this morning. The Aussie started higher, boosted by new Prime Minister Gillard who called for a truce between the government and the mining industry regarding a 40 percent tax on miners’ profits, beginning in 2012.

The Canadian dollar has come under pressure after surging higher on Wednesday. Heightened risk aversion and uncertainty from the Bank of Canada’s Lane and Carney combined with a very weak Canadian retail sales report. The high so far today is 1.0448 and is trading at 1.0426 just before the open of U.S. equity markets.

Week Ahead: China’s Yuan Statement Rallies Risk Assets

Global equity markets surge on news that China will let its currency float gradually over time. The dollar slips as investor appetite for risk rises.

Market Preview

The risk trade is back in favor after China’s announcement that it plans to gradually let the yuan float against the U.S. dollar. Global risk assets (stocks and commodities) jumped higher on Monday after the central bank news out of China.

In overseas equity markets this morning, Hong Kong’s Hang Seng index rose 3.1 percent. Japan’s Nikkei 225 jumped 2.4 percent and China’s Shanghai Shenzen surged 3.1 percent.

The German DAX is higher by 1.4 percent mid-day. Britain’s Footsie 100 is also up by 1 percent.

U.S. S&P 500 index futures were trading higher by 1.5 percent in Monday’s pre-market action.

Crude oil prices rose to the highest level in six weeks after China announced it will increase flexibility in its currency. Oil is up over 1.5 percent this morning and hovering around $78.50 a barrel.

Spot gold is trading higher by 0.4 percent, near its all-time high just above $1,262 an ounce.

The euro is trading at 1.239 after rebounding against the dollar earlier this morning. The single currency had traded as low as 1.237 today. This price action is all on the heels of the euro’s best weekly advance in nine months against the greenback last week.

China Loosens Currency Peg

On Saturday, China’s central bank announced plans to enhance the flexibility of its exchange rate. China ruled out a one-time revaluation and indicated any strengthening of the yuan would be gradual. The U.S. government has pressured China to let its currency move more freely against the dollar.

An appreciation of the yuan is expected to translate into lower inflation risk and greater purchasing power for Chinese consumers while increasing inflation risk and lowering purchasing power for U.S. consumers. Lower inflation in China would take the pressure off the People Bank of China (China’s central bank) to raise interest rates in an attempt to cool off the its high growth economy.

Mining stocks are expected to benefit from this move as it reduces the pressure for continued monetary and fiscal policy tightness in China.

Mining stocks surged in London this morning with Xstrata higher by 4.8 percent and BHP Billiton (BHP) jumping 4.3 percent.

Economic Preview

On the economy, existing home sales for May will come out on Tuesday with observers expecting an annualized rate of just over 6 million in sales forecast for the month, a five percent rise from the 5.77 million sales rate reported for April.

New home sales will be released on Wednesday with an annual rate of 400,000 forecast for May, a 20 percent decline from the 504,000 rate for the previous month.

Also on Wednesday, the two-day meeting of the Federal Open Market Committee (FOMC) ends and releases a statement. The Fed will again likely leave short-term interest rates unchanged at nearly zero percent. Language in the statement is once again expected to say that rates will stay “exceptionally low” for an “extended period.” The FOMC will also likely maintain that expansion in the economy continues with few signs of inflationary pressure. is However, the statement could mention potential risks to the U.S. economy, particularly from a European sovereign debt and banking crisis.

On Thursday, initial jobless claims will be released with expectations for 465,000 new unemployment claims for the week of June 19th. Economists will be watching this week’s number carefully after the Labor Department reported higher than expected jobless claims last week.

Also on Thursday, all eyes will be on the durable goods orders announcement. Orders for durable goods are forecast to be weak, with economists forecasting a 0.5 percent decline for May after rising 2.9 percent in April.

Earnings Preview

On the earnings front, Adobe Systems (ADBE) will report on Tuesday. Analysts are expecting first quarter profits of 42 cents per share.

Oracle (ORCL) will post profits on Thursday, with Wall Street expecting 55 cents per share.

Also on Thursday, the Blackberry company, Research in Motion (RIMM) is expected to report $1.33 per share in earnings.

KB Homes (KBH) will post earnings on Friday with analysts expecting a loss of 30 cents per share.

Euro Rises on Spanish Bond Bid

In Thursday morning’s foreign exchange trading, the euro continued to move higher against the U.S. dollar.

The euro rallied early this morning on news that Spain was able to sell government bonds amid worries the bond sale might fail.

Later this morning, the euro also got a boost on disappointing U.S. initial jobless claims. The euro traded as high as $1.2409, up from $1.2260 at 8:30 AM.

The British pound and Japanese yen also jumped higher against the dollar on the weak U.S. jobless claims data.

Spot gold surged almost $15 or 1.2 percent this morning, trading at $1,246 an ounce.

Dollar Edges Lower Waiting for Bernanke Testimony

The U.S. dollar edged downward on Wednesday morning as traders are anxiously waiting for Federal Chairman Ben Bernanke’s testimony before Congress on the state of the economy and monetary policy.

Traders aren’t expecting to hear any new information on the exit strategy from quantitative easing. The Fed has already taken symbolic “tightening” actions by terminating various special credit facilities, increasing the discount rate 25 basis points from 0.5 percent. In addition, just yesterday the Treasury revived the Supplementary Financing program, draining about $200 billion of liquidity.

It is always a big event for currency markets when the Federal Reserve Chairman testifies because the Chairman is often asked questions about the economy and monetary policy. The last time Mr. Bernanke spoke was on February 10, about one week before the central bank announced the surprise 25 basis point hike in its discount rate.

Comments by Bernanke could rally the dollar if he answers questions with a hawkish tone and introduces new ideas for tightening monetary policy in the near future. Higher interest rates would be bullish for the dollar and bearish for hard assets, including gold.

The U.S. dollar index, a trade-weighted basket of six major currencies traded against the greenback, is at 80.780 just before the Fed chief’s testimony, down from 80.874 in late trading yesterday.

The euro edged slightly higher to change hands at $1.3562, up from $1.3534 or 0.4% on Tuesday.

Traders expect the euro will continue a downward bias as fears over Greece’s sovereign debt crisis continue to chip away at the European common currency. Unions are balking against austerity measures to reduce Greece’s annual budget deficit.  Greek unions staged a one-day strike on Wednesday.

The greenback had gained on Tuesday against most major currencies other than the Japanese yen, on concerns about the pace and sustainability of the global recovery after a drop in German business confidence and lower consumer sentiment in the U.S. were reported.