Stronger US dollar

(28.03.2011) The US dollar has strengthened on a broad basis, driven ie by hawkish comments from Feds Plosser on Friday. The Germnan Chancellor Merkel lost her majority in Badem-Wuerttemberg this weekend. Today US consumer data will be the most important data.

By Knut A. Magnussen, Senior Economist at DNB Markets

us dollarLast week ended positively with most stock markets rising. In the US the S&P5000 rose 0.3% and the week was then the best one since early February. Hence it looks like markets have turned more positive after having being hold back by the events in Japan, Libya and the European debt crisis recently. However, one should expect markets to remain volatile going forward and the Asian markets fell with Nikkei 225 down 1% last night.

Feds Plosser moved markets
on Friday giving some hawkish comments in a speech. He said that monetary policy will have to be tightened (ie higher rates and a sell-off of assets) in a not to distant future. This caused long US rates to climb somewhat, despite the fact that it is well known that Plosser is a hawk and will not gain support for his view in the FOMC.

In addition the USD strengthened. The EURUSD have fallen from almost 1.42 on Friday to around 1.4050 this morning. Some of the euro weakness may be due to the fact that Merkel lost her majority in the important state of Badem-Wuerttemberg this weekend after having been in power for 58 years. The Green party and the Social Democrats got 47.3% of the votes. The outcome may imply that Merkel will lose some of her political power. The USD also gained vs the NOK and even more so vs the JPY over the weekend. The USDJY is this morning trading at around 81.80 – the highest level since just after the coordinated intervention at March 17.

The optimism among Norwegian consumers are rising albeit slowly. According to the monthly poll, ForbrukerMeteret, the confidence index rose 0.4 point to 10.2 in March. The average index in Q1 hence was the highest since before the crisis struck the Norwegian economy in Q3 2009. Even if actual consumer demand has been slow in the start of the year due to high electricity prices, this indicates that demand may pick up during the spring. Still low interest rates and somewhat lower unemployment point at even higher optimism in the coming months.

Once again the German ifo-index surprised positively. Even if the main index fell somewhat – to 111.1 in march – this was still higher than estimated in advance (110.5). The assessment of the present situation rose, while the prospects for the future fell somewhat. The latter may be due to the increased uncertainty related to the recent events in Libya and Japan. However, this should not affect demand for German exporters much. Monetary growth in the euro zone (M3) rose more than expected in February. Growth picked up from 1.5% in January to 2.0% in February. Even if this is still a low pace, the upturn shows may imply that the ECB will find it more comfortable to raise rates as planned at the April meeting.

US GDP-growth was revised up from 2.8% to 3.1% for Q4. This was somewhat more than anticipated. Private investments contributed most to the adjustment, while the negative stock contribution was lower than previously indicated. On the other hand government demand and net exports were somewhat weaker than in the preliminary data. The core consumer demand deflator was only 0.4% in Q4, but has risen somewhat in Q1. The Michigan consumer sentiment was revised slightly lower for March. The decline was not much taken into consideration the recent events in Japan and Libya.

A large amount of data is due this week, both internationally and in Norway. Most important domestically is consumer demand (retail sales and goods consumption) and unemployment due on Thursday and Friday respectively. Housing prices and manufacturing PMI for March will also be published on Friday. Internationally the stress tests of the Irish banks (due on Thursday) may become important, while US data for employment (payrolls) and ISM will attract attention on Friday. It is expected that employment will grow by almost 200.000, but the unemployment rate is expected to stay unchanged in March.