= WORLD FOREX: Euro Remains Stronger, Buoyed By 3Q US GDP Data

Thursday, Oct 29, 2009

 
   By Bradley Davis 
   Of DOW JONES NEWSWIRES 
 

NEW YORK (Dow Jones)--The euro strengthened against the dollar and yen in New York trading Thursday, buoyed by better-than-expected third quarter growth data from the U.S, but its gains could be muted as cautious investors look toward next week's decision on key U.S. interest rates.

The 3.5% expansion in U.S. gross domestic product--more than the expected 3.2%--could stop the recent broad slide in riskier asset classes and currencies as investors, concerned over the pace of the global economic recovery, pulled back on risk.

Stocks opened higher, signaling a return of some risk appetite that this week had fled cautious markets, but if stocks don't hold onto their gains, some analysts said the broad correction across asset classes could establish itself more solidly, leading to further dollar strength.

Currency investors are "wary that equity gains wont be sustained," said Daniel Katzive, currency strategist at Credit Suisse in New York.

In morning trading, the euro was at $1.4790, from $1.4705 late Wednesday, according to EBS via CQG. The dollar was at Y91.26, from Y90.82, while the euro was at Y134.95, from Y133.55. The U.K. pound was at $1.6556, from $1.6370. The dollar was at CHF1.0211, from CHF1.0272.

The Dollar Index, a trade-weighted basket of six currencies, was at 76.115, from 76.228 late Wednesday.

U.S. stocks were up 67 points in morning trading, while Treasurys were solidly in the red ahead of the final auction for the week, an offering of $31 billion in seven-year notes.

GDP "broadly fits in the small positive sweet spot for risk," said Alan Ruskin, international strategist at RBS, adding that the figures are "not too strong to bring forward rate hike expectations, or too weak to encourage thoughts of the recovery faltering."

The euro's gains against the dollar could be muted, as cautious investors may not bulk up on risky positions ahead of next week's Federal Reserve meeting, said Sebastien Galy, currency strategist at BNP Paribas in New York.

The Fed could tweak the language in the statement accompanying its decision on key U.S. interest rates, which are not expected to change. Any hint that rates could increase sooner than expected would lead to further dollar strength.

Besides the Fed, a host of central bank meetings are on next week's calendar, including the Bank of England and the European Central Bank.

The GDP growth was driven by consumer spending, which surged 3.4% last quarter, helped by government stimulus programs such as cash for clunkers. Another bright spot: housing posted its first increase since the last quarter of 2005, also helped by government assistance. Residential fixed investment surged by 23.4%, the largest rise since 1986.

Also adding to growth was a slowdown in inventory drawdowns, which added 0.94 percentage point to overall growth.

The rise in GDP was the first since the second quarter of 2008.

Jobless claims, though, continue to lag overall economic growth, as Thursday's weekly numbers came in worse than expected. Initial claims for jobless benefits declined by 1,000 to 530,000 in the week ended Oct. 24; economists had expected a larger decrease of 6,000 claims.

"The major millstone hanging around the economy is the weak labor market," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, N.J. "Jobless claims are still highly elevated. It does keep the overall outlook on the soft side," lending support to the dollar as investors are hesitant to bulk up on riskier currencies.

   Canada Morning 

The Canadian dollar was moderately stronger early Thursday, taking advantage of an easier global risk environment overnight and widespread gains against the U.S. dollar after the better-than-forecast outcome for third quarter U.S. GDP figures.

The currency's latest slump to 3-week lows may have been somewhat overdone due to the "constant stream" of commentary from the Bank of Canada over the past week about the currency's elevated levels, said currency strategist Jacqui Douglas of TD Securities, though "scope for a Canadian dollar bounce may be limited at the moment" given pending risks from data and other events.

Early Thursday, the U.S. dollar was at C$1.0728 from C$1.0803 late Wednesday.

-By Bradley Davis, Dow Jones Newswires; 212-416-2654; bradley.davis@dowjones.com

(Paul Evans in Toronto contributed to this article.)

(END) Dow Jones Newswires

October 29, 2009 10:19 ET (14:19 GMT)