USD Enjoying Mixed Fortunes

The British Pound fell against the U.S. Dollar and most of the other major currencies as traders speculate that continuing credit market losses at banks will slow growth of the British economy and forestall higher British interest rates. Sterling suffered its biggest single session drop against the U.S. Dollar in over three weeks after one of Britain’s largest lenders announced a large loss due to its exposure to sub-prime loan write offs.

The British news elevated the level of risk aversion in the market, but the Dollar was able to weather the storm and held onto last week’s gains versus the Euro. The Institute for Supply Management reported its factory index improved from 486 in April to 49.6 in May. Although a number below 50 indicates negative growth, the improvement is still beneficial news for the U.S. economy as domestic manufacturers benefit from the impact of a weak Dollar.

The risk aversion caused by the British credit market news helped boost the Japanese Yen, especially against the South African Rand and the Norwegian Krone, as investors unwound carry trades while digesting the implications of the British news.

The Canadian Dollar weakened for the second day this morning, dragged lower as oil prices retreat. As a net exporter of oil, the Canadian Dollar is often influenced by movements in oil prices. Also, the Canadian economy has felt the drag from the declining economic fortunes of its largest trading partner, the United States, and there is speculation that the Bank of Canada may cut interest rates next week to try and goose the economy.