The dollar stayed near a six-week low against the euro and a five-week trough versus the yen after a U.S. government report showed on Friday that the pace of home construction fell 14.3 percent in January, the sharpest drop since Octobe r. U.S. home construction fell sharply last month while producer prices moderated, according to government data on Friday that lent weight to expectations the Federal Reserve will lower interest rates later this year. U.S. producer prices shrank a slightly bigger-than-forecast 0.6 percent in January, as energy prices declined sharply. Analysts polled by Reuters had predicted producer prices would fall 0.5 percent while core, non- food, non-energy producer prices were forecast to rise 0.2 percent last month, which they did.
In addition, U.S. consumer sentiment slipped unexpectedly in February to 93.3 from a two-year high of 96.9 last month as concerns over unemployment and inflation sapped confidence.
The dollar, which had initially softened on the housing numbers, ended on a steady note against the euro and yen but chalked up a steep loss for the week. U.S. Treasury bond prices ended the session higher as hopes for a Fed rate cut helped the market add to the week’s gains, even though harsh weather might have curtailed home building. The weather impact did not shield the stock prices of home builders, with the
Dow Jones Home Builder index down 1.6 percent at one point before partially recovering to end 0.58 percent lower.
But trade would stay subdued and investors remained hesitant to bet aggressively as markets in China, Hong Kong and Singapore were closed for the Chinese New Year, traders said. U.S. financial markets were also closed on Monday to mark the Presidents Day holiday.
Elsewhere, Eurozone economic data continues to outperform with the trade surplus increasing from 2.0 billion to 2.5 billion in the month of December. The hawkishness continues to be reflected in the comments from European officials. ECB Wellink said
that the economy is running at full steam while Gonzalez-Paramo said that the ECB cannot be calm on inflation risks. In the week ahead, there are number of second tier Eurozone data such as French GDP, consumer prices, Eurozone current account and industrial orders. The most important release is the German IFO report on Friday. Business sentiment is expected to hold steady but we believe that the risks are skewed to the downside since January’s optimism may have stemmed from the aggressive consumer spending that we saw in the month of December. Looking ahead, the risks that the Value Added tax may begin to hurt the economy are increasing and business confidence could reflect that outlook. According to few economists expect the European Central Bank to raise rates to 3.75 percent from 3.50 percent next month and probably again by mid-year as data showed the euro zone economy powered to a six-year growth high in 2006.
Meanwhile, it has been a tough week for the British pound as weak economic data caused the currency to under perform against both the Euro and US dollar. There was no UK data released on Friday but the EU Commission raised their GDP forecast for the UK from 2.6 percent to 2.7 percent this year. At this point, there is only a slim chance for a rate hike in March. However, with the UK, things change frequently and next week’s busy economic calendar could easily shift the market’s outlook. The Bank of England will be releasing the minutes from their monetary policy meeting earlier this month.
At the other end, the best performing currency pair of the week was the Japanese Yen. The combination of a strong GDP report and liquidation of yen shorts have sent the Yen soaring against all of the majors.The market’s main focus is going to be whether the Bank of Japan would raise the overnight call rate to 0.5 percent from a current 0.25 percent at its two-day policy meeting kicking off on Tuesday.

Week: February 05 - February 09 2007