Strong U.S. Data Drives Dollar Strength

dollar etfMarcus Holland: The currency markets needed to absorb a plethora of new information on Thursday, as both the ECB and the BoE met to determine interest rates, and countries around the globe released purchasing manager’s data.  Stronger than expected PMI numbers in Europe failed to lift the currency as yields in the US continue to drive the dollar higher. Dovish comment from the FOMC and the ECB has created polarizing forces on the EUR futures.

On Thursday the ECB met and decided to keep interest rates unchanged.  After the meeting the President of the ECB Mario Draghi met with the press and expressed the ECB’s feelings on monetary policy. The key for market participants is that rates will remain at current levels for an extended period and, although the economy is gradually recovering, the risk of contraction is greater than expansion.

According to Draghi, the ECB will use the full arsenal of refinance operations through July 2014. Rates will remain steady for an extended period is conditioned on the ECB’s assessment of price pressures and the trajectory growth in the EU economy.  As for forward guidance, Draghi stated that the ECB discussed in their meeting whether to repeat the stable or lower forward guidance every meeting. Draghi also spent some time discussing the weak condition of the financial system and the challenges to the transmission of monetary policy.

Euro futures were also eroded by strong US yields which continue to benefit from better than expected July economic data.  On Wednesday, ADP released private payroll data that was stronger than expected.  According to ADP private payrolls increased by 200K compared to the 160K expected by economists.  Yields popped above the 2.60% level, and continue to trade near the top end of the current range.  In other employment data, jobless claims declined by 19,000 to 326,000, which is the lowest level since January 2008, according to the Labor Department. Economists had expected claims to rise to 345,000 last week. The four-week moving average for claims fell 4,500 to 341,250.

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