May 16, 2008 

The US dollar strengthened against a basket of currencies after April housing starts came in higher than expected and new building permits turned up for the first time in five months.  However, any gains were erased as preliminary consumer confidence index figures tumbled to its lowest in 28 years in May to 59.5.  Initially, many investors positioned themselves to receive disappointing US housing figures, but the April housing starts rose 8.2% to an annualized pace of 1.032 million, up from 954,000 in March.  This new annualized pace injected a positive tone into the fragile economy.  Many hope that the worst of the credit crisis is over as their appetite for risk whet.   

  The euro initially weakened against the dollar after April US housing starts came in higher than expected, but soon regained any losses against the dollar after May US consumer confidence index came in lower than expected.  In other news, the European Central Bank will be providing up to $25 billion in 28-day funds every two weeks to euro zone banks to ease the interbank lending market.      

The pound remained under pressure against the dollar as investors worried about toxic combinations of high inflation and slowing growth in Britain.  After the Bank of England delivered bearish news about Britain’s economy on Wednesday, many analysts forecast BoE to hold rates at 5.0% adding pressure to the pound. 

The Japanese yen gained against the dollar after data on Friday showed Japan’s economy grew 0.8% in the first quarter from the previous quarter and May US consumer confidence index tumbled to its lowest in 28 years. 

The Canadian dollar strengthened against the US dollar as oil reached record highs above $127 per barrel.  The commodity-linked Canadian dollar has done well this month, making it the second-best performer among the most active-currencies. 

The Australian dollar strengthened against the US dollar, while the New Zealand dollar remained little changed against the US dollar.  According to RBC Capital Markets, China has decided to invest in Australia’s commodity-producing companies to export raw materials such as iron ore and coal, which could ultimately help the Australian dollar outperform major currencies over the next 12 months.