The dollar weakened against the euro yesterday due to a better than expected consumer confidence report and more positive house price data. This resulted in an increase in investors’ risk appetite, thus weakening the dollar as the main safe haven currency. The euro benefited from US data showing a surprise jump in consumer confidence in April, in the most positive reading of the US Conference Board index since last November. The index, based on a representative sample of 5,000 US households, leapt to 39.2, up from an amended 26.9 in March. Most analysts had predicted a more modest rise to 29.9. Other data also showed an easing of the pace of decline in home prices in major US cities in February. The Standard & Poor's/Case-Shiller report was consistent with other data suggesting stabilisation in the US housing market after two horrific years.
The euro also rose on the back of comments made by ECB board member Lorenzo Bini Smaghi, who indicated that quantitative easing measures have not been conclusively determined as of yet, and it may be that the ECB only cuts interest rates by 25 basis points at their next meeting on May 7, as opposed to also introducing non conventional measures to combat the recession.
Nevertheless, the dollar’s losses were limited due to continuing fears regarding the global outbreak of swine flu. Moody’s stated yesterday that the global macroeconomic impact of the flu could reduce global GDP by £225.6bn and the outbreak also adversely affected the FTSE 100, which closed down 1.7 percent at 40996.4. Additionally, concerns have arisen regarding stress tests for major US banks. It was leaked ahead of the official release that Citigroup and Bank of America are likely to be forced to boost their capital levels in advance of the stress tests, so a further bailout may be required. The tests themselves are due to be announced on May 4 and are designed to conclude whether banks can withstand further grim economic activity without collapsing.
Investors are now awaiting the outcome of a two-day meeting of the US Federal Reserve this evening, where monetary policymakers are expected to keep boosting the supply of cheap credit to the ailing US economy since slashing its base interest rate to virtually zero. Also on the US calendar is the government's first estimate of gross domestic product for the first quarter, expected to show an annualised 4.9 per cent contraction after the fourth-quarter drop of 6.3 per cent.
Other announcements taking place in the US today include MBA Mortgage Appplications. In the eurozone economic confidence, consumer confidence and industrial confidence will be released today.
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