Hawkish remarks from ECB President Jean-Claude Trichet spurred bearish sentiment for the US dollar and strengthened the euro to pick up the biggest gains against the greenback as it moved to test 1.56, and was followed by the British pound as the pair rose to test 1.96. Rising stock prices spurred demands for carry trades and led the low yielding Japanese yen to rack up loses against the US dollar. On the other hand, the Swiss franc advanced to trade near 1.350 against the greenback. On the other side of the spectrum, the New Zealand dollar was the only commodity currency to weaken against the greenback, while the Australian and Canadian dollar soaked in minor gains due to a rise in commodity prices.
The European Central Bank President Jean-Claude Trichet heightened demands for the euro as he opened up the possibility of a rate hike at next month’s meeting, and went onto say that the central bank is watching medium to long-term inflation risks with ‘heightened alertness.’ As President Trichet continues to abide by the ECB mandate, market participants have already begun to price in a rate hike by the central bank next month, with Bundesbank President Alex Weber supporting Trichet’s comments as he said the ECB ‘will follow words with actions.’ On the economic front, unemployment conditions improved slightly as Initial Jobless Claims fell to 357K from 375K, while Continuing Claims fell to 3093K from 3109K. Amid the minor improvement in unemployment, the ICSC Chain Store Sales also brightened the economic outlook for the US as the index rose 3.0 percent in May.
The unexpected improvement in the economy led the stock markets to advance for the first time this week, with Wal-Mart adding to the mix as they posted better-than-expected same store sales for the month of May. As a result, the DJIA rallied 213.97 points to 12,604.45 points, with 27 of the 30 components advancing. Among the broader indices, the S&P 500 picked up 26.85 points to hold off at 1,404.05 points, with 206 stocks rising to a fresh 52 week high.
Rising stock prices curbed the appeal of US Treasuries, and swayed demands for risk free bonds. As a result, the benchmark 10-Year yield rose to 4.042 percent from 3.976 percent, while the 2-Year yield surged to 2.499 percent from 2.451 percent.
Looking ahead, we expected major event risks for the US dollar at 12:30 GMT as the Non-Farm Payroll report is expected to fall to -60K from -20K, with the Unemployment Rate forecasted to inch higher to 5.1 percent from 5.0 percent. At the same time, the Average Hourly Earnings report is due out for release, with the slew of market moving data coming to an end after the Consumer Credit release at 19:00 GMT.