US Dollar Higher After G8 Summit on Russian FinMin Comments, Lower Stocks (Euro Open)

The US Dollar advanced in overnight trading, boosted by supportive comments from Russian Finance Minister Alexei Kudrin at the weekend’s G8 summit as well as renewed demand for safety-related assets after stocks fell over 2% in Asian trading.

[U][B]Key Overnight Developments[/B][/U]

[B]• NZ Annual Manufacturing Sales Shrink for First Time Since Q3 2007
• G8 Finance Ministers Consider Plans to Roll Back Fiscal Stimulus
• Russian FinMin Says US Dollar Fundamentals Are in ‘Good Shape’[/B]

[U][B]Critical Levels[/B][/U]

The [B]US Dollar[/B] gapped higher following supportive commentary at the weekend’s G8 summit and a decline across Asian stock exchanges, adding as much as 0.5% against an average of six top global currencies. The [B]Euro[/B] tested as low as 1.3947 while the [B]British Pound [/B]ticked to a low of 1.6361 ahead of the opening bell in Europe.

[U]Asia Session Highlights[/U]

[B]G8 finance ministers[/B] sounded notably more upbeat about the global economy at a meeting in Lecce, Italy over the weekend, with policymakers beginning to think about strategies for unwinding aggressive fiscal stimulus and bank bailout measures that have been put in place in recent months. While the general consensus seems to hold that it is too early to trim the more than $2 trillion in governments’ spending commitments, German Finance Minister Peer Steinbrueck advocated for the formulation of a “credible exit strategy” to avoid stoking inflation as economic recovery takes hold. US and UK representatives Timothy Geithner and Alistair Darling led the wait-and-see camp, with Geithner saying that “growth should remain the principal focus of policy” and Darling added that “no-one is talking about exiting yet.” IMF Managing Director Dominique Strauss-Kahn also sounded cautious, saying, “We have to stay very careful. The recovery is weak…growth as an average will only come back at the beginning of 2010 which means an unemployment peak at the beginning of 2011."

Although the official communiqué did not include currency-specific language, Russia’s Finance Minister Alexei Kudrin said his country had full confidence in the [B]US Dollar[/B] after the summit. Kudrin added that fundamentals of the Dollar are still in “good shape” and said it was “too early to speak of an alternative” reserve currency. The remarks are a notable departure from earlier comments by President Dmitriy Medvedev and Kurdin himself that questioned their faith in the greenback; indeed, the central bank announced as recently as last week that it would convert some of its reserves to International Monetary Fund debt from US Treasury bonds, leading USD lower. Strauss-Kahn echoed Kudrin’s sentiment, saying he didn’t foresee a “weak dollar”.

New Zealand’s [B]Manufacturing Activity[/B] report revealed sales shrank for the first time since the third quarter of 2007, shedding -0.2% in the three months to March. Twelve of the fifteen manufacturing sub-sectors tracked in the report printed lower, bolstering expectations that the smaller antipodean economy shrank for the fifth consecutive quarter to start the year, prolonging the deepest recession in over three decades. Meat and dairy sales, New Zealand’s top export commodities, bucked the downward trajectory to add 10.9% from the previous quarter. Indeed, stripping out meat and dairy would have seen annualized sales tumble by a whopping -5.9%. Importantly, the improvement likely came courtesy of a weaker currency: the New Zealand dollar’s average trade-weighted value held near the lowest levels in seven years through the first quarter. Looking ahead, dairy and meat sales are likely to suffer in the months ahead as the currency’s recent gains discourage foreign buyers. Indeed, Reserve Bank of New Zealand chief Alan Bollard has explicitly said that a stronger Kiwi dollar was “unhelpful” for exports. Separately, the Performance of Services Index rose to 46.2 in April from 43.7 in the previous month, showing the sector shrank for the thirteenth consecutive month, albeit at a slower pace.
[U][B]Euro Session: What to Expect[/B][/U]

Switzerland’s [B]Producer and Import Prices[/B] are expected to tumble -4.7% in the year May, suggesting continued pressure on consumer prices in the months ahead as firms pass on lower input costs via cheaper finished goods. Although the Swiss National Bank has committed to aggressive monetary easing to combat sliding prices, the annual pace of CPI growth has continued to drop, contracting by a record -1.0% in May. Further weakness threats to entrench deflation expectations, committing the mountain nation to a long-term period of stagnant economic growth as consumers and businesses are encouraged to wait for the best possible bargain and perpetually hold off on spending and investment. The central bank is set to announce policy again this week, opening the door for Swiss Franc volatility as policymakers seem keen on expanding their arsenal of unconventional stimulus measures.

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