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Forex outlook:
The dollar rallied to a 4-1/2-year high against the yen on Wednesday, helped by data indicating U.S. retail sales growth in May was the highest since January 2006 which many investors took as a sign of a pickup in U.S. economic growth. Limiting the dollar's gains was a dip in the U.S. 10-year Treasury yield which fell from five-year highs even as more investors seem willing to bet that the Federal Reserve's next move could be a hike in interest rate.
Higher U.S. rates raise the attractiveness of dollar denominated securities and stoke demand for the dollars to buy them. "The market is interest rate focused and retail sales were really quite strong suggesting economists may revise up their forecast for the second quarter even further," said Meg Browne, currency strategist at Brown Brothers Harriman. "But a lot of the good news is already in the market."
The euro went down 0.1 percent yesterday. The euro had plumbed an 11-week low of $1.3264 a day before. The dollar rose to a four-month high of 1.2469 Swiss francs, up for its fifth consecutive session before surrndering some gains.
Some U.S. investment banks in the last few weeks have upwardly revised their views on U.S. economic growth in the second quarter to a 4 percent annualized rate, which would be a sharp rebound from the first quarter. Markets have also reflected expectations of faster growth. While U.S. Treasury debt rose on Wednesday largely due to short-covering, yields have raised steeply since April on a steady stream of stronger economic data, pulling the dollar higher in their wake. Over the last week, bond markets have even begun to price in a chance that the Federal Reserve will raise interest rates next year.
Gold: U.S. gold futures ended modestly lower on Wednesday, as general concerns about rising interest rates interrupted an earlier advance. Higher-than-expected U.S. retail sales and import price data also suggested inflation was heating up, prompting investors to liquidate, traders said. "Interest rates are totally driving this," said Frank McGhee, head precious metals trading at Chicago's Integrated Brokerage Services LLC. "The last two to three days, gold has been predominantly following the U.S. interest rate market," McGhee said. "With market forces taking interest rates up without central bank action, you are starting to look at liquidity issues." Gold traders generally fear that a higher interest rate scenario will slow investment demand for gold. As real domestic and international rates rise, liquidity begins to tighten, lifting the dollar. As the currency strengthens, it hurts dollar-denominated gold purchases in overseas markets. Inflationary implications from two U.S. economic reports on Wednesday guided both gold and bond prices.
Crude Oil: U.S. crude oil futures rose more than 1 percent on Wednesday as refined products futures, especially heating oil, strengthened on renewed fuel supply concern after government inventory data showed that while total distillate supplies were up, heating oil supply fell. Crude supplies rose 100,000 barrels, but gasoline supplies gasoline supplies were unchanged after five straight weeks of supply builds. Refinery capacity use also fell, against analyst views.
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