Dollar Monthly Gain Againsts Euro, Yen

Dollar Heads for Monthly Gain Against Euro, Yen on Rate Outlook

May 30 (Bloomberg) -- The dollar was headed for a second straight monthly advance against the euro and yen as signs of improving economic growth boosted investor confidence in U.S. assets.

The U.S. currency also traded close to a three-month high versus the yen as traders bet the Federal Reserve will raise interest rates later this year. The dollar pared its monthly gain against the euro today as private reports showed a measure of U.S. business activity shrank in May, while manufacturing in the Milwaukee area was the weakest in five years.

``The idea that the Fed will continue to cut rates has been completely put to bed and the market is now flirting with the idea of a rate hike,'' said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut. ``That has given the dollar a boost.''

The dollar touched $1.5461 per euro, the strongest level since May 16, before weakening to $1.5550 as of 11:23 a.m. in New York, from $1.5519 yesterday. It has risen 0.4 percent this month. The dollar traded at 105.51 yen, from 105.50 yesterday, when it reached 105.87, the highest since Feb. 28. It has gained 1.5 percent this month against the yen. The euro rose to 164.10 yen, from 163.71 yen yesterday.

Brazil's real was the biggest gainer this month among the 16 most-traded currencies versus the dollar, rising 2.2 percent. South Korea's won, with a 2.7 percent drop, was the weakest.

Income Growth

The dollar got a brief boost after a government report showed personal income was stronger in April than economists expected. Incomes grew 0.2 percent, bolstered in part by the government's tax rebates, after a 0.4 percent increase the prior month. The median forecast was for a drop to 0.1 percent.

The U.S. economy expanded at a 0.9 percent annual pace last quarter, faster than the Commerce Department's April 30 estimate of 0.6 percent, the government said yesterday. U.S. durable goods orders excluding transportation equipment rose 2.5 percent in April. The median forecast in a Bloomberg survey was for a 0.5 percent drop.

``The data has been dollar-positive because they'll allow the Fed to keep rates where they are,'' said Greg Anderson, a foreign exchange strategist at ABN Amro Bank NV in Chicago. ``They show the opposite of stagflation.''

The National Association of Purchasing Management-Chicago said today its business index rose to 49.1 this month, higher than forecast, from 48.3 in April. Figures below 50 signal contraction. The NAPM-Milwaukee's monthly index of regional manufacturing fell to 45, from 48 in April.

German Consumption

The euro fell earlier after retail sales in Germany, Europe's largest economy, unexpectedly dropped in April.

Sales adjusted for inflation and seasonal swings fell 1.7 percent from March, when they dropped 2.2 percent, the Federal Statistics Office in Wiesbaden said. Economists in a Bloomberg News survey forecast a gain of 0.6 percent.

``Consumption in Germany is cooling down due to hefty oil prices,'' said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank AG, Germany's second-largest bank. ``In such a situation, the Fed could raise rates faster than'' the European Central Bank. The euro may fall to $1.52 by June 30, he said.

Britain's pound will fall to 81 pence against the euro in coming months as a weakening economy prompts investors to resume bets the Bank of England will add to interest rate cuts this year, according to a Dresdner Kleinwort note yesterday.

Euro Versus Pound

The euro rose to 78.63 British pence, from 78.51, after falling as low as 78.34 following the German retail sales report. The euro reached 80.98 pence on April 16, the strongest since its inception in 1999.

U.K. consumer confidence dropped in May to the lowest level since Margaret Thatcher was ousted from office in 1990, as people became more pessimistic that the economy will slip into a recession, GfK NOP Ltd. said today. The U.S. currency advanced to $1.9712 against the British pound from $1.9766.

Futures on the Chicago Board of Trade show a 29 percent chance the Fed will raise its target rate by a quarter- percentage point to 2.25 percent on Sept. 16, up from 19 percent a month ago.

Oil in New York traded at about $127 a barrel for delivery in July. Crude declined more than $4 a barrel yesterday, the biggest drop since March, as record prices reduced demand for fuel. The price is double a year ago.

Canada's dollar fell 0.6 percent to 99.36 Canadian cents per U.S. dollar from 98.77 yesterday after a government report showed the economy unexpectedly shrank in the first quarter, fueling speculation the central bank will cut borrowing costs next month.

The nation's central bank lowered the target lending rate by a half-percentage point to 3 percent on April 22. Borrowing costs have been cut four times since December from 4.5 percent. Policy makers meet on June 10 to decide on rates.

U.S. GDP, Initial Jobless Claims and Core PCE.

U.S. GDP, Initial Jobless Claims and Core PCE.

The PCE will not matter this time so we can be focused on the GDP and the job market. The GDP annualized is expected to come out at 0.9%. I would be looking to trade a deviation of 0.4.

BUY
If it comes out at 1.3% or higher, buy USD/JPY and look for 40 pips move.

SELL
If it comes out at 0.5% or lower, sell USD/JPY and look for 40 pips move as well.

LOOK OUT
However, a lot of people don't trust the GDP number saying that the U.S. government is "manufacturing" the numbers to eliminate the panic on the market. We will have U.S. Initial Jobless Claims coming out at the same time. This can provide some confusion on the price action. Lately, we did not see huge deviations on this report.

What I would do is use the Initial Jobless Claims report as a back up data so if the GDP comes out pretty close to expectations but the Initial Jobless Claims deviates in the same way, then enter a trade as well.
If it comes out at 390 K or higher, it should be bad for the U.S. dollar and you should see some selling pressure. If it comes out at 350 K or lower, you should see some positive pressure on the USD/JPY.

NOTE
However, people will care more about the GDP than the Initial Jobless Claims.

BLOOMBERG

Yen Falls to 1-Month Low as U.S. Stocks Gain, Spur Carry Trade

May 27 (Bloomberg) -- The yen fell to a one-month low against the euro and dropped versus the dollar as an advance in U.S. stocks encouraged investors to add to holdings of higher- yielding assets funded in the Japanese currency.

The yen declined against the Australian and the New Zealand dollars, two favorites of so-called carry trades. The Australian dollar traded close to a 25-year high versus its U.S. counterpart, while the kiwi dollar gained a sixth straight day. The U.S. dollar extended gains versus the yen and euro as new- home sales in the U.S. unexpectedly rose in April.

``We are seeing improvement in risk appetite, and that's weakening the yen,'' said Samarjit Shankar, director of global strategy for the foreign exchange group in Boston at Bank of New York Mellon. The firm is the world's largest custodian bank, with more than $20 trillion in assets under administration.

The yen touched 163.89 per euro, the weakest since April 28, before trading at 163.82 at 10:07 a.m. in New York, from 163.10 yesterday. It declined to 104.29 per dollar, from 103.43. The euro fell to $1.5708, from $1.5770 yesterday, after rising to $1.5818, the highest level since April 24.

The Standard & Poor's 500 Index rose 0.6 percent.

In the carry trade, investors get funds in a country with low borrowing costs and invest in another with higher interest rates, earning the difference between the two. The risk is currency moves erase those profits.

Japan's benchmark rate of 0.5 percent compares with a central bank rate of 4 percent in Europe, 2 percent in the U.S., 7.25 percent in Australia and 8.25 percent in New Zealand.

Euro's Reversal

The euro reversed gains versus the dollar after reports showed German consumer confidence fell more than economists forecast and French business confidence declined to the weakest in more than two years in May.

GfK AG's index for June declined to 4.9, from 5.6 in May, the Nuremberg-based market-research company said today. Economists in a Bloomberg survey predicted the gauge would fall to 5.7, from an initial May estimate of 5.9. An index of sentiment among 4,000 French manufacturers slid to 102, the lowest since December 2005, from 106 in April, the country's statistics office said.

``We see weakness developing in many aspects and that's why we are seeing a retreat'' from the euro, said Hans-Guenter Redeker, global head of currency strategy in London at BNP Paribas SA, France's biggest bank.

Consumer Prices Rise

Consumer prices in the euro region rose 3.5 percent in May, faster than the 3.3 percent gain the previous month, according to a Bloomberg News survey. The statistics office will release the figure on May 30.

The dollar extended gains as new-home sales in the U.S. rose 3.3 percent to an annual pace of 526,000 from a 509,000 rate the prior month that was the lowest in 17 years, Commerce Department data showed. A separate report today showed home prices dropped last quarter by the most in at least 20 years.

Confidence among U.S. consumers fell to the lowest level in more than 15 years. The Conference Board's confidence index declined more than forecast to 57.2, the lowest level since October 1992, from a revised 62.8 in April, the New York-based research group said.

GBPJPY

GBP JPY is in a consolidation after the last bearish movement. The consolidation should continue. The price should move around 203.00 to 206.00