US Fed faces tough balancing act

The dollar will be in a much stronger position to sustain a correction if there is a sustained improvement in growth data. The US currency will face tough barriers to sustained gains unless there is evidence of significant deterioration in Euro-zone growth.

The US currency again tested record lows early in May before staging a corrective recovery after the US economic data was generally stronger than expected. The Euro found good support below 1.3550 against the US dollar as US currency sentiment remained fragile, but has struggled above the 1.36 level. The Euro was subjected to a correction against the yen which also restrained it against the dollar.

The US ISM index for the manufacturing sector recovered to 54.7 in April from 50.9 the previous month with the orders, employment and prices indices all rising strongly. There was a similar result for the services-sector index with an increase to 56.0 for April from 52.4.

The ADP report recoded a subdued 64,000 increase in employment for April. Jobless claims, however, fell to 305,000 in the latest week, a four-month low. There was an 88,000 increase in non-farm payrolls for April while unemployment rose to 4.5% from 4.4%.

As far as inflation is concerned, the core PCE inflation index was unchanged in March with the annual rate dropping to 2.1% from 2.4%. The first-quarter increase in unit labour costs was held to 0.6%, but the increase for the fourth quarter of 2006 was revised up to 6.2% from 3.8%. Hourly earnings rose 0.2% in April in the monthly payroll data.