US Dollar post gains against the Euro

Friday, March 19, 2010

The cost of living in the US was unchanged in February, underlining the Federal Reserve’s prediction that inflation will remain low as the economy continues to recover. It is the first time the consumer price index did not rise since it decreased in March 2009 and followed a 0.2% gain in January according to figures released by the Labor Department in Washington yesterday. Excluding food and energy costs the core index rose by 0.1% in line with forecasts, capping the smallest year on year gain since 2004. Markets have remained very competitive with big retailers such as Wal-Mart keeping prices low as unemployment nears 10% and foreclosures mount. The lack of inflation is one of the reasons why the Federal Reserve maintained the benchmark interest close to zero earlier this week.

Another Labor Department report yesterday showed fewer Americans filed first time claims for jobless benefits last week, for the third consecutive time, a sign that the labor market is improving. The number of first time jobless applications dropped by 5,000 to 457,000 in line with expectations.

Growth in the manufacturing sector is continuing, manufacturing in the Philadelphia region expanded in March at the fastest pace so far this year. The Federal Reserve Bank of Philadelphia’s general economic index rose to 18.9%, in line with expectations. Earlier this week figures from the New York Fed showed business activity in that region expanded for an eight straight month in March. Another central bank report showed industrial production increased in February for an eighth month and capacity utilization rose to the highest level in more than a year. Fed policy makers this week said the economic recovery is still constrained by unemployment and persistent weakness in real estate and pledged to keep the benchmark interest rate near zero for an “extended period.”

In the forex online market the USD gained 0.9% on the Euro yesterday fuelled by renewed uncertainty surrounding the proposed bailout for Greece. It closed trading at EUR 1.3607. Tomorrow US Fed Chair Ben Bernanke is due to deliver a speech to the Independent Community Bankers of America National Convention. It is expected that he will continue to defend the position of the Federal Reserve in relation to the bank's supervisory role.

In the UK, government borrowing could be less than forecast this financial year after better than expected figures for February. The UK government borrowed £12.4bn in February, less than economists had expected, according to figures released by the National Statistics Office yesterday. The figure for January was also revised sharply downwards, to £43m from £4.3bn. Borrowing in the current financial year has now reached £131.9bn, but analysts say the full-year total may be less than the government's £178bn forecast. Until recently, most analysts thought the government's borrowing forecast was too optimistic.

The borrowing figure for February was not as bad as some had feared, partly because of the rise in VAT at the beginning of this year and new taxes on bankers' bonuses. The government is also paying out slightly less in benefits because unemployment is falling. The figures will give a boost to Gordon Browns Labor government ahead of next Wednesday’s budget.
Sterling gained 1.1% on the US Dollar yesterday ending the session at USD 1.5245. It rose 0.31% against the Euro closing trading at EUR 0.8931.

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