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Upturn in Risk Appetite Hurts US Dollar

February 8, 2011 - Written by John Cameron

The US Dollar lost ground against the majority of major currencies during last night’s Asian session. Asian equity markets traded into positive territory, signalling an upturn in appetite for risk which in turn caused institutional investors to move away from the safe-haven of Dollar-denominated assets.

The improvement in risk sentiment was partly due to the better-than-expected Japanese Current Account figure for December which was released at the start of the overnight Asian session. Analysts had expected export growth of JPY1,530.8bn; when released, the figure showed an increase of JPY1,555.9bn. This signalled that Japanese export growth has increased for the third month in a row as Japan’s export markets continue to show healthier levels of economic activity.

This swing in risk sentiment has benefitted the high yielding currencies with the New Zealand Dollar in particular benefitting; it has gained almost 1% against Sterling in early trading.
The RICS house price survey released overnight in the UK gave further basis for optimism, showing that the number of UK Chartered Surveyors reporting a decline in house prices in January outnumbered those reporting price increases by only 31% versus expectations of 38%, representing the best figure for six months. This follows a positive Halifax house price survey figure released last week and has renewed optimism that the UK Housing sector may at last be waking from its post-2007 slumber.

The BRC Retail Sales figure which was released overnight also provided some cause for support for the Pound, showing that UK Retail Sales in January were up by 2.3% year-on-year. However, initial optimism regarding the figure dissipated when BRC Director General Stephen Robertson commented that the gains were due to a flurry of shoppers taking advantage of discounted prices in shops at the start of the month ahead of the hike in VAT.

Meanwhile, in the Eurozone, yesterday morning’s German factory order number for December was slightly weaker than had been anticipated, giving concern that this morning’s German industrial production figure may also disappoint. On a more positive note, yesterday’s Eurozone Sentix Investor Confidence survey provided some ground for optimism, coming out at 16.7 versus expectations of 14.0.

Elsewhere, the sovereign debt situation continues cast a dark shadow over the Euro. Later today, the European Central Bank will release a further tranche of 1-month bonds. Market-makers will be watching closely to see what the take-up of this short-term debt by European Retail Banks will be. Given the relative lack of economic data due for release in today’s European session, this debt auction will have added significance. Any lack of interest, following recent poor uptakes for Irish and Portuguese auctions would weigh heavily on the single currency.
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