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The US dollar continued to weaken yesterday as comments from a Chinese state official on the dangers of holding too many dollars as reserves which only adds to the weakness caused by the still weak momentum in the US recovery and fears over a delay from the Fed in exiting their quantitative easing program. The official stated that China should guard against the risks of “excessive” holdings of USD-denominated assets because the dollar will continue to weaken against other major currencies. EURUSD pushed to a new 1 month high of 1.4690 overnight as the euro remained nice and bid throughout the American session overnight with GBPEUR also falling back through the 1.12 level.

Ben Bernanke spoke last night in Atlanta and seemed to back away from the notion of a further round of asset spending in the US. He said “The US economy is recovering from both the worst financial crisis and the most severe housing bust since the Great Depression, and it faces additional headwinds ranging from the effects of the Japanese disaster to global pressures in commodity markets. In this context, monetary policy cannot be a panacea.”

Equities turned negative as a result of the speech with Asian markets also down overnight.

The euro remained bid yesterday as what data is being released is coming out positive for the region. Eurozone retail sales rose 0.9% in April on the back of higher food, drink and tobacco spending, a likely result of the Easter period, and it reversed the falls seen in March. German factory orders were also strong, rising by 2.8% in April with capital and consumer goods leading the way. This increases the chance that we will see a further rate rise from the ECB in July and we will be looking at the language Jean Claude Trichet uses in tomorrow’s press conference very closely; any mention of the word ‘vigilance’ and you will see the euro make some ground versus its crosses. We expect this to keep euro fairly well bid through today’s session so you’d have to say gains for GBP are unlikely at this stage.

The second reading of European GDP is due at 10.00 with the market expecting confirmation of 0.8% growth while the Beige Book due from the US at 19.00 will likely get more attention than most given the poor manufacturing and jobs numbers of late.

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Date: Tuesday June 14^th at 17.00 in Central London

Latest exchange rates at time of writing