Dollar: Should You Be Worried About the US economy?
The US dollar staged another strong rally today, with the currency strengthening the most against the Japanese Yen and New Zealand dollar. Housing data has made everyone very worried about the outlook for the US economy, but along the same lines, that pessimism has been tempered by the fact that the labor market is holding steady. Jobless claims remain consistently low with this week’s data coming below 300k for the second week in a row. The 4 week moving average of jobless claims is now 305.5k, down from 317.5k. The last time we saw average claims this low was in Feb 2006, when non-farm payrolls for that month jumped from 206k to 300k. As long as jobs are plentiful, the problems in the housing market will probably not worsen since the number one bill that people pay when they receive their paychecks is usually their rent or mortgage. Furthermore, a healthier labor market also makes it easier for US consumers to weather the pain of higher gasoline prices. It is clear that jobs will continue to cushion the economy and keep the dollar afloat, which will reduce the pressure on the Fed to reconsider their plans to leave interest rate unchanged. If you are not worried about the housing market, then you do not need to be worried about today’s leading indicator release which dropped by 0.5 percent last month. Not only did the upward revision to the March figure completely offset the April fall, but the biggest component contributing to the weakness was building permits. So once again, it is the housing market that is weighing on growth, so as long as the housing market does not collapse, then the soft landing scenario is still in play. Meanwhile the manufacturing sector continues to recover. The Philadelphia Fed index increased from 0.2 to 4.2 in the month of May, which follows the rebound in the Empire State survey reported earlier this week. The most interesting thing about the release is the sharp improvement in the employment component. This supports the possibility of strong job growth next month.

Euro Slips after ECB Report Fails to Give Further Guidance on Future Hikes
Even though the Euro is continuing to lose value against the US dollar, it is still holding well near the 1.35 level. There was no economic data released overnight aside from the ECB monthly report. The tone of the report was the same as the tone that ECB President Trichet took at his press conference earlier this month. The central bank still feels that interest rates are moderate and remain accommodative, which confirms that interest rates will be increased in June. However there were no clues as to what may happen beyond June and that disappointment triggered a wave of Euro selling that lasted into the US trading session. Interestingly enough, we are also beginning to hear some less hawkish commentary. ECB member Ordonez said today the recent rate hikes have been cooling lending growth in Spain while EU head Junker warned that should the Euro accelerate too much, the ECB and the Eurogroup may have to take action. Intervention is not likely a realistic option at this point because the same effect would be achieved if the ECB openly announced an end to rate hikes.

British Pound Drops on Fear that Retail Sales Could Weaken
The British pound extended yesterday’s weakness despite the lack of economic data. Although some of the selling can certainly be attributed to broad dollar strength, today’s price action also suggests that traders may be expecting a weaker retail sales number tomorrow. Recent inflation data has already made many traders skeptical about further interest rate hikes, particularly in June. Prior to the May rate hike, the market was pricing in two back to back doses of tightening. If consumer spending does come out weak, then the Bank of England has no reason to lift interest rates again in the second quarter. Judging from the BRC retail sales report, the outlook for spending is not promising. In the month of April, according to the BRC, total sales decreased from 6.2 percent to 4.7 percent while same store sales fell from 3.9 to 2.4 percent. The BRC retail sales report tends to be a good directional indicator of how retail sales will fare for the same month.

Yen Weakens Across the Board After BoJ Fails to Deliver
The Japanese Yen is weaker across the board after the bank of Japan failed to deliver the increased degree of hawkishness that the market was looking for. The GDP data released a few hours before provided a good clue as to why the central bank may have opted to remain conservative. Growth in the first quarter was a weaker than expected 0.7 percent, which drove the annualized pace of growth from 5.0 percent down to 2.4 percent. The deflator did improve, but ultimately it still remains in negative territory. The details of the data indicate that even though exports are increasing, capital expenditures is weak. There is not enough here to push a more aggressive stance by the BoJ so BoJ Governor Fukui simply reiterated that interest rates will be adjusted gradually. The economy is still struggling to recover and even though the weak yen should speed things up, Japan still has a long way to go.

Canadian Dollar Resumes it Rise as Traders Anticipate Strong Spending Data
After moving in lockstep for the past few days, we saw very divergent price action in the majors over the past 24 hours. Against the US dollar, the New Zealand dollar sold off, the Australian dollar ended the day unchanged while the Canadian dollar raced back towards its 11 month highs. In Australia, consumer inflation expectations dipped from 18.3 percent to 14.2 percent while average weekly wages grew stronger than expected. Overall, the mostly softer inflation pressures are making it difficult for the AUD/USD to rally. The 2007/2008 Budget unveiled by Finance Minister Cullen of New Zealand was most positive for growth going forward. Starting in April of next year, the corporate rate would be dropped from 33 to 30 percent. The kiwi sold off however as Cullen reminded the markets that he is very unhappy with the level of the currency because it was overvalued and as a result, hurting exports. However this is nothing new since these are the same comments that he has been making for months. Canada continues to report solid economic data with both consumer prices and wholesale sales beating expectations. This suggests that we could see stronger Canadian retail sales tomorrow as well.

Kathy Lien is the Chief Currency Strategist at FXCM.