The USD makes a surprising recovery

The USD finished off last week on a very positive note as the dollar rose against all major currency, following the release of Friday’s stronger than expected economic indicating that the United States was recovery faster than other developed countries.

When markets closed on Friday, the Dollar reached a 7 month high versus the Euro as the EUR/USD drastically fell allowing the dollar to cross the 1.4 EUR/USD mark- closing at 1.3860. The dollars increasing momentum was also shown as it hit a hit a three week high against the British pound, closing at 1.5983 on Friday. The USD also gained against the CHF and the CAD.

The gains in the US dollar can be attributed to the release of Friday’s advanced GDP. The report showed a rapid increase of 5.7% for Q4 of 2009 – the fastest increase in 6 years. Such positive data raises expectations that the U.S FED would potentially increase interest rate before the European Central Bank, thus encouraging investors to move into dollar based assets.

However, despite this unexpected accelerated growth in the Q4, many economists are concerned that this economic rebound may not be sustainable as fiscal and monetary stimulus is withdrawn and recent data shows the recovery in housing and retail demand slowing.

A closer evaluation of the Q4 GDP, reveals that much of the increase in the GDP was due to increased auto production and rebuilding of inventories; at the same time, consumer spending and investments remain weak.

Much of the improvement in Q4 GDP was due to increased auto production and rebuilding of inventories. Consumer spending and business investments remain weak. USD traded higher after release of stronger than expected GDP. The GDP report may have some analysts looking for an earlier FOMC rate hike. The GDP deflator however came out below expectations which suggest that inflationary pressures remain tame despite improving growth.

While the USD may have ended January on a promising note, it is questionable if it can continue its uphill battle and regain some of the previous year’s losses against it major counterparts. The first week of February already promises us some interesting economic action, starting today with the release of Personal Spending expected to increase 0.3% compared with the 0.5% of last month, and the January ISM Manufacturing PMI expected at 55.5 compared to last month’s 54.9. Tomorrow, the US will release its Pending Home sales - expected to remain at the same rate as the previous month. US Dollar traders will have to pay strict attention to any surprises in the Non Farm payroll results, released later this week on Friday.

This week, the US will also be releasing its unemployment claims, followed by the unemployment rate predicted to stay constant at its dismal level of 10%. Its predicted that the US labor market added a net 13,000 jobs throughout the month of January-however, these numbers are notorious for being volatile and very difficult to predict.

Its sufficed to say that USD is in for a risky week- whether or not the dollar manages to hold on tight to its previous week’s gain, all depends on whether this week’s fairly positive predictions transpire.