US Dollar Gains Slightly, Japanese Yen Slips as Chrysler Files for Bankruptcy, US Personal Spending Contracts

The US dollar ended Thursday mostly higher, though the Canadian dollar and British pound were the strongest of the majors, while the Japanese yen slipped. All told, most of the day’s moves marked more of a consolidation of Wednesday’s rally in risky assets, and many currencies ended the day at precarious points. Though EUR/USD and GBP/USD both chopped above intraday trendline resistance at 1.3340 and 1.4840, respectively, they both closed just below those points. Likewise, the DXY index broke below a rising trendline that has supported the greenback’s rally from July 2008, but subsequently closed just above. Finally, the S&P 500 closed slightly lower at 872.81, indicating that the index has yet to truly break above the 2009 high of 877.86. That said, there is potential for equities to rally hard and for the US dollar and Japanese yen to fall across the majors, but a surge in risk aversion is likely to lead to sharp reversals.

Indeed, US news was broadly disappointing today, as Chrysler filed today for bankruptcy protection in a reorganization effort that will include Italian carmaker Fiat as a partner. Meanwhile, the preferred stock rating of American Express, the biggest US credit card company by purchases, was downgraded by Standard & Poor’s Ratings Services to BB, which is non-investment grade, from BBB. The announcement came after Moody’s Investors Services announced on April 24 that they were cutting their long-term debt rating to A3 from A2, just four levels above non-investment grade. In economic news, the US Commerce Department said that personal income growth fell for the second straight month in March at a rate of 0.3 percent, while personal spending slipped for the first time since November at a rate of 0.2 percent. A breakdown of personal spending shows that consumption of services remained positive, but purchases of durable and nondurable goods contracted. This leaves some downside risks open for downward revisions to Q1 GDP, especially since personal consumption was one of the strongest components, registering a 2.2 percent increase during the quarter. Meanwhile, the US Labor Department said that initial jobless claims tumbled by 14,000 during the week ending April 25 to 631,000, while continuing claims surged by 133,000 to a fresh record high of 6,271,000, suggesting that the US unemployment rate is likely to climb even higher.

Looking ahead to Friday, the 10:00 ET release of the ISM Manufacturing index will give a more timely view of conditions in the economy. The April reading of the index is anticipated to rise to 38.4 from 36.3, and while this would mark a slight improvement, the index would ultimately still be close the nearly 29-year low of 32.9 reached in December. This would also mark the fifteenth straight month of contraction in business activity, suggesting that the recession's grip remains strong. Weaker than expected results could lead flight-to-safety to push the US dollar higher, while numbers in line with expectations or better could weigh the currency down.

Euro, British Pound End on Mixed Note as European Data Points Toward ECB Rate Cut, Credit Easing

The British pound was one of the strongest major currencies on Thursday, while the euro lost ground to the US dollar and gained against the Japanese yen as economic news from the Euro-zone was broadly disappointing. In Germany, the unemployment change rose for the sixth straight month in April by 58,000, pushing the unemployment rate to 8.3 percent from 8.1 percent. Likewise, the Euro-zone unemployment rate jumped to match the late-2005 highs of 8.9 percent in March from 8.7 percent. Adding to the mix, Eurostat’s inflation estimate for the region went unchanged at an annualized 0.6 percent in April, leaving CPI well below the European Central Bank’s 2.0 percent target and adding to evidence that the ECB will likely cut rates by 25 basis points to 1.00 percent on May 7. However, that isn’t even the big question mark lingering over this meeting, as many ECB officials have hinted that they will announce “unconventional” measures, which many have taken to mean a plan for credit easing.

Looking ahead to Friday, the April reading of the UK’s Purchasing Managers’ Index (PMI) for the manufacturing sector is projected to edge up to 40.0 from 39.1, marking the second straight increase. It would also be the twelfth straight month that PMI held below 50, which indicates a contraction in business activity, albeit at a slower pace. This doesn’t tend to be a huge market-mover for the British pound, but if the indicator rises much more than projected, the currency could see at least a brief boost.

New Zealand Dollar Under Pressure Post-RBNZ Rate Cut, Canadian Dollar Dominates

The New Zealand dollar was the weakest of the majors after the Reserve Bank of New Zealand cut their official cash rate target last night by 50 basis points to 2.50 percent, as the "world economy deteriorated more than expected" during Q1. The reduction was in line with forecasts published by Bloomberg News, but differed from what Credit Suisse overnight index swaps were pricing in, as they only fully reflected a 25 basis point cut. Looking to the RBNZ Governor Alan Bollard’s policy statement, it is clear that the central bank has cut back their inflation expectations due to weaker global growth and tight financial conditions. Furthermore, the RBNZ anticipated that the “adverse economic forces generated by the crisis to remain dominant throughout 2009,” with the “timing and extent of recovery” remaining “highly uncertain.” Adding to this bearish sentiment, the RBNZ expected to leave the OCR at or below current levels through the end of 2010, which leaves further downside risks for the New Zealand dollar, especially if risk aversion remains a lingering issue.

The Canadian dollar, on the other hand, dominated as USD/CAD finally broke below 1.2000. Economic data worked in favor of the move, as raw material prices for the region surged 12.1 percent in March, suggesting that persistent inflation pressures may force the Bank of Canada to raise rates before many of their foreign counterparts. Meanwhile, Canadian GDP slipped 0.1 percent in February as expected following a 0.7 percent plunge in January, suggesting that the recession in the nation is not worsening and instead, the Canadian economy appears to be holding up fairly well despite the global slowdown and lingering financial market issues.

Terri Belkas is a Currency Strategist at FXCM.