Thursday, May 12, 2005

U.S. economy shows good numbers; dollar higher

The dollar surged to a six-month high against the euro and gained versus the yen after U.S. retail sales in April rose the most in seven months. U.S. retail sales climbed 1.4 percent, the Commerce Department said in Washington. Wal- Mart Stores Inc., the world's largest retailer, said first- quarter profit rose 13.6 percent, below analysts' estimates.

The European Commission cut its forecast for second- quarter growth to about 0.4 percent, from a previous forecast of 0.5 percent. The U.S. economy is expected to grow at a 3.2 percent pace in the second quarter.

Interest-rate futures show traders are increasing bets the Fed will lift its interest-rate target three more times to 3.75 percent by year-end. The yield on the December Eurodollar futures contract was 4 percent in New York, up from 3.815 percent before last week's jobs report.

One item still hanging over the dollar is Chinese yuan revaluation. Two events happened recently that makes me concerned about the USD's steady climb. One is concern that the yuan was going to be revalued early this week. Traders sold off the USD/JPY pair and it fell hard. The rumor was/is that the revaluation could happen on May 18. The other is the trade imbalance situation. The U.S. had good numbers earlier this week, but that was due to the import pipeline being full. Once the import product pipeline loosens up we could be right back where we started (104.25 USD/JPY on May 4, 2005).

This China GDP growth of 9.5% has me wondering if the Chinese economy can maintain this pace. If Chinese imports take-off again, will thier economy overheat a bit? If so, the yuan would have to add value. About 4% is the general consensus. Does the Bank of Japan want a stronger yuan? Maybe not. If their export markets don't expand with a weaker yen, than they certainly would not improve with a stronger yen as a result of a value added yuan. Japan is in a bit of a lerch. The Bank of Japan may intervene by buying dollars and ask yourself when will they intervene..... before or after the yuan is revalued?

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