Dollar fades despite bombs and missiles

Dollar fades despite bombs and missiles
US consumer confidence sharply higher
Sterling heads into resistance zone.

Good morning. You can tell the US dollar is out of favour when missile tests and even nuclear explosions are not enough to send it higher. Not so long ago a North Korean rocket would have investors - especially Japanese investors - scurrying for the safety of the dollar. There has been none of that in the last couple of days. The United Nations Security Council has complained but the market is unmoved.

If the threat of a South East Asian war was not enough to motivate dollar buyers there was no chance of the ecostats doing the job. It did look for a while in the morning as though the dollar might be in for a bit of a rally after losing ground last week. During the first couple of hours it added a cent against the pound and the euro. But conviction was lacking among investors. By lunchtime they had decided to seek their fortunes elsewhere. The dollar had to hand back its morning gains and it continued to drift lower overnight.

It did so despite a 40% jump in the Conference Board's index of US consumer confidence. The index rose from April's 39.2 (40.8 after adjustment) to 54.9 in May. The Case-Shiller metropolitan house price index fell by a slightly more than expected 18.7% in the year to March but that was not a bad enough number to account for the continued exodus from the dollar. Not was there any endogenous reason for the Yen's loss of ground. Like the dollar, it went down because investors are more scared of bank failures than nuclear missiles and nobody is doing bank failures this week.

The absence of that fear factor worked in sterling's favour, as it also did for the commodity dollars and other risky assets. The Canadian dollar was the best performer among the main-stream currencies, closely followed by the Aussie.

Given the complete absence of any correlation between economic data and currency performance recently (there was none from Canada, Australia or Britain yesterday) it seems pointless to bother about today's agenda. Nevertheless, tradition demands it: We can look forward to German inflation, French and Italian consumer confidence, UK mortgage approvals (the BBA version), US existing home sales and the government's house price index. Pick the bones out of that lot. There, told you it wasn't worth bothering with.

On the other side of that coin it is also fair to observe that there is nothing on the timetable likely to thwart sterling's effort on the upside. What it does have to worry about, however, is the proximity of psychological resistance for cable and technical resistance for sterling/euro. The November low and the February high are only a cent or so away and will inevitably give sterling buyers reason to consider taking some of their profits. History says the pound will fall back yet again but last week's experience shows what might happen if it does not.