Forex - Dollar continues to strengthen ahead of Treasury report, key data

Forex - Dollar continues to strengthen ahead of Treasury report, key data

	Published : Tue, 12 Jun 2007 17:30 By : Agencies Print this Story

LONDON (Thomson Financial) - The dollar continued to strengthen ahead of key data releases later this week, with the market also looking ahead to legislation that could address concerns that China is allegedly keeping its currency undervalued.

US lawmakers are to unveil a bipartisan bill tomorrow 'to address undervalued currencies that harm US trade and economic interests'. Lawmakers say China in particular undervalues its yuan currency, making US-bound exports cheaper and fuelling a ballooning US-China trade deficit.

However, the dollar will not necessarily benefit from the new bill, said Ashraf Laidi, chief foreign exchange analyst at CMC Markets.

'In the event that the proposed currency legislation seeks to directly impact currency markets -- whether via supporting intervention or imposing a time element to force Chinese revaluation -- the US dollar should face broad selling pressure, especially against the Japanese yen,' he said.

Also on Wednesday, the US Treasury is due to issue its semiannual report on currencies to Congress.

The administration of US President George Bush is under pressure from lawmakers in the Democratic-controlled Congress to call China a 'manipulator' of the yuan, although analysts at Bear Stearns do not believe it will do so.

'Some time ago the Treasury suggested that if it were to cite China, it would be such a significant step that it would probably have to 'prepare' the market for such an announcement beforehand. Clearly the Treasury has not

done this,' they said.

However, Julian Jessop, chief international economist at Capital Economics, reckons that the Treasury is in danger of losing its credibility if it does not cite China is a currency manipulator. He also noted that the timing of the advance notice is unusual.

'The last report was slipped out just before Christmas without any fanfare, which suggests that the Treasury might actually have something interesting to say this time,' he said.

Later in the week, the focus will shift to Friday's consumer price figures, which could have serious implications for interest rate expectations and, by extension, the dollar.

The US currency has been buoyed by stronger-than-anticipated US economic news, which also prompted a slump in US Treasuries as the prospects of an interest rate cut diminished.

'Friday's US CPI release is likely to cause... dollar declines in the event of another retreat in the year-on-year core CPI towards the 2.0 pct figure, while an unchanged figure at 2.3 pct may be dollar neutral,' said CMC Markets' Laidi.

Elsewhere, the pound continued to strengthen against the euro and was steady against the dollar following yesterday's hawkish speech by Bank of England governor Mervyn King.

King said the rate-setting Monetary Policy Committee will be 'watching closely' indicators of capacity pressures, pricing intentions and inflation expectations.

'If these indicators remain elevated, the MPC may need to take further action,' King added.

These comments diminished the market's response to inflation figures this morning which showed the annual CPI rate falling for the second month in a row.

The office for National Statistics said annual CPI inflation eased to 2.5 pct in May from 2.8 pct in April. The fall was in line with expectations.

'King effectively neutered the good news contained in this month's release, directing market attention firmly to the medium-term and highlighting concerns over the outlook,' said David Page, an analyst at Investec Securities.

'One more rate hike (to 5.75 pct) looks inevitable; we suspect that should be it,' he added.

London 1705 BST London 1335 BST

US dollar

yen 121.75 down from 121.76

sfr 1.2423 up from 1.2406

Euro

usd 1.3320 down from 1.3340

yen 162.20 down from 162.56

sfr 1.6551 down from 1.6553

stg 0.6743 down from 0.6756

Sterling

usd 1.9747 up from 1.9740

yen 240.44 up from 240.40

sfr 2.4536 up from 2.4491

Australian dollar

usd 0.8438 up from 0.8418

stg 0.4272 up from 0.4262

yen 102.75 up from 102.52

alex.brittain@thomson.com

abr/dca

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