Dollar fell against major currencies ahead of key economic data, FOMC and rate decision

The Dollar fell against a basket of currencies on Monday, breaking a three-day rally, as buyers retreated to the sidelines ahead of key economic data and the Federal Reserve's policy meeting this week. Analysts said the Dollar would likely stay confined to current trading ranges, awaiting a push from either the Federal Open Market Committee (FOMC) statement accompanying its interest rate verdict or first-quarter growth numbers, both due on Wednesday. The policy-setting FOMC is widely expected to cut the benchmark overnight lending rate by only 25bp to 2% at the end of a two-day meeting, and signal that its interest rate-cutting campaign is over for now. Growing speculation that the Fed might stop cutting interest rates and a rise in U.S. stocks on takeover deals earlier lifted the Dollar and global sentiment improved last week amid stronger-than-expected US corporate earnings and a growing view that the worst of the credit crisis has passed.

EurUsd climbed 0.24% to 1.5656, snapping a three-day decline. But it was still about 3cts below last week's record high of 1.6019. UsdJpy dropped 0.53% to 104.11 after touching 104.82 intraday high. UsdChf was lower by 0.25% at 1.0337. GbpUsd rose 0.39% at 1.9913 after posting 1.9781 – 1.9965 extreme low and high.

Comments from European Central Bank’s officials repeating their warnings about persistent inflation lent the Euro mild support. ECB President Jean-Claude Trichet and Governing Council member Yves Mersch both said risks to price stability remained on the upside, with Trichet adding that there were no grounds for complacency. Their comments suggested the ECB is not ready to start cutting interest rates from 4% soon, even with regional data pointing to an inflation slowdown in four German states for April. A surprise jump in a gauge of German consumer sentiment also helped the Euro, as it indicated that the euro zone's biggest economy may be in better shape than indicated by last week's weak Ifo business confidence survey.

U.K. Housing And Retail Data Weigh on Pound, Will The BoE Cut Again?

The U.K. CBI distributive trades report crossed the wires at -26, sending the pound over 50 points lower. The reading was over eight times lower than the -3 that was expected. The pound was weighed lower throughout the overnight session as U.K. mortgagee approvals fell to 64,000-the lowest level in at least nine years. The tight credit markets remain an obstacle for borrowers and will continue to suppress house prices going forward. Central Bank Governor Mervyn King said today that the “ratio of house prices to earnings will fall” when speaking to the U.K treasury select committee. He would go on to say that although retail sales have been “surprisingly strong” consumer spending will fall, possibly quite sharply. The MPC leader would also reiterate the committee focus on keeping inflation near their target, but if consumer consumption continues to falter, another rate cut may be needed to cushion the fall of the economy.

The Euro fell to as low as 1.5539 during the overnight session, despite light trading due to a Japanese holiday, on a four year low in retail sales. The Eurozone retail PMI index fell to a seasonally adjusted 41.8 in April from 48.2 the month prior, as rising food and energy costs saw consumer’s buy 40% less food and drinks. Rising inflation has kept the ECB frozen in its tracks as its mandate is to maintain price stability. The central bank has continued to maintain its hawkish stance, despite mounting evidence that the regions economy is starting to realize the affects of the U.S. slowdown and the credit crisis. As long as the current interest rate differential is expected to hold between Europe and the U.S., the Eur/Usd will find support and prevent any significant reversal from the dollar.

The New Zealand Dollar came under heavy selling pressure when its annual trade deficit widened NZ$50 million in March, against expectations of a surplus of NZ$395. The shortfall was a result of an eight month low in exports, bringing the 12 months ended March 31 total deficit to NZ$4.42 billion. New Zealand exporters saw a decline in demand from China, shipping nearly 40 million less goods. The Kiwi fell as low as 0.7762 before consolidating around 0.7780. Economic growth is expected to slow to its lowest levels in over ten years, as record interest rates have dulled growth faster than officials had hoped.

U.S. consumer confidence and the S&P/ Case Schiller home price index will serve as the appetizer for tomorrow’s Fed Rate decision. The two indicators will give investors insight into the most troubling areas of the economy. Expectations are that the housing industry will continue to deteriorate and in turn drag consumer confidence with it. Until the housing sector establishes a bottom, the downside risks to the U.S. economy will remain, which will continue to weigh on the dollar. However, a rebound in these numbers combined with the expectation that the central bank will signal a pause to their current easing cycle may have Dollar bulls looking to test support at 1.54.

It’s All About the (ECB Interest Rate) Numbers

It’s All About the (ECB Interest Rate) Numbers

Now that the world has had a full day to sample and digest the G-7 strong Dollar rhetoric it seems that talk is cheap…and not particularly satisfying. At the end of the day interest rate differentials still determine, or are the single most powerful determinate of global Forex rates. So those who are hoping…and trying to will the USD to strengthen are destined to be disappointed. While fundamentals in the US are still weak and the ECB is unmoved on cutting interest rates, EUR/USD is likely to test new all-time highs within the immediate future. The ECB is handcuffed by the threat of inflation and several ECB Officials have indicated that "there is no room for EuroZone rate cuts this year." In a sign that frustration may be taking over in the EuroZone, ECB Officials have begun to claim that Euro is unfairly carrying the burden of dollar depreciation, perhaps suggesting that Asian currencies should/could appreciate further. This is a clear shot at Yen, but again talk is cheap and the interest rate differential…and more importantly interest rate volatility is clearly leading the market sentiment.

China yuan central parity rate set at 7.0002 to dollar vs 6.9898

The central bank has set the yuan central parity rate at 7.0002 to the dollar, according to the China Foreign Exchange Trading System.

The rate, published on the official Chinamoney website (www.chinamoney.com.cn), compares with the midpoint of 6.9898 set the previous trading day.

The People's Bank of China (PBoC) started setting a daily central parity rate on Jan 4, 2006.