US Dollar Falls As Oil Hits New Highs Above $124

The US dollar lost ground against most of the major currencies due to surging oil prices, and led the low yielding Swiss franc and Yen to take the biggest bite out of the greenback as investors curbed their risk appetite. As a result, the New Zealand and the Canadian dollar were the only currencies to trail against the greenback, while the Australian dollar picked up a modest gain as better than expected employment data heightened the appeal of the Aussie. Against the major European currencies, the US dollar slide against both currencies as the European Central Bank and the Bank of England opted to hold the benchmark interest rate at 4.00 and 5.00 percent, respectively. As a result, the euro picked up to trade just above 1.54, while the British Pound held up to trade at 1.95.

The European Central Bank decided to hold key rates at 4.00 percent as President Jean-Claude Trichet reiterated his hawkish tone and focused on upside inflation risks - signaling that he is in no rush to trim rates this year. The Bank of England also held the benchmark interest rate at its current level of 5.00 percent as BOE Governor Mervin King stood ready to fight off inflation. Fresh economic data brightened the outlook for the US as unemployment conditions slightly improved - reflected by the decline in Initial Jobless Claims to 365K from 383K, paired with a fall in Continuing Claims as index dipped slightly lower to 3020K from 3030K. The retail sector also noted an unexpected improvement as Wholesale Inventories declined for the first time since 2006, with ICSC Chain Store Sales index adding to the mix as it surged to 3.6 percent from -0.5 percent in March.

Increase volatility shook the stock markets as oil futures spiked above $124 a barrel, but ended the session in positive territory as Wal-Mart and News Corp. posted better than expected profits. As a result, the DJIA rose 52.43 points to 12,866.78 points, with Alcoa and Chevron leading the advancers. Among the broader indices, the S&P500 picked up 5.11 points to hold off at 1,397.68 points amid 207 stocks falling to a new 52 week low.

Instability in the stock markets pushed risk adverse investors into the safe haven of risk free bonds, and sparked increased demands for US Treasuries. As a result, the benchmark 10-Year yield fell to 3.782 percent from 3.850, while the 2-Year yield plunged to 2.227 percent from 2.316 percent.

Looking ahead, we expect increase volatility in the Canadian dollar as fresh employment data is scheduled for release at 11:00 GMT, with the International Merchandise Trade index adding to the mix as we forecast the trade surplus to narrow to C$4.5B from C$4.9B. The Trade Balance report for the US will be the last bit of economic data for the week, and is due out for release at 12:30GMT.

DailyFX

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