Dollar Performs Well
after U.S. data

The U.S. dollar remained broadly higher on Wednesday, even after weaker data on New York state’s manufacturing sector and U.S. wholesale prices.

“We’re still seeing this relentless drive by the U.S. dollar that is absolutely incredible,” said Colin Cieszynski, a senior market analyst at CMC Markets.

The ICE dollar index, which measures the greenback’s moves against six other major currencies, traded at 83.833 on Wednesday, the highest level since July 2012, compared to 83.575 late Tuesday.

The WSJ Dollar Index, an alternative gauge of the currency’s moves against a slightly wider basket, pared gains in the wake of economic data.

The index was at 75.32 in recent trade, higher than 75.23 on Tuesday but lower than 75.50 earlier Wednesday.

U.S. wholesale prices dropped in April by a seasonally adjusted 0.7%, led by a fall in gasoline prices. That’s the biggest decline in the producer-price index in more than three years. The wholesale-prices data in April show that inflation isn’t currently an issue, which means the Federal Reserve can continue quantitative easing for now without worrying about a spike in inflation.

The Empire State manufacturing survey, which measures manufacturing strength in the New York region, turned negative in May, missing economist expectations. A negative reading means more survey participants expect conditions to worsen.

The dollar gains stem from relative economic performance. So while the U.S. data out today weren’t stellar, they still make the U.S. economy look more attractive than the euro-zone economy, which had several economic reports miss expectations today.

“In general, the U.S. is being seen as one of the relatively stronger economies, so it’s attracting capital. If people want to buy U.S. stocks or Treasurys, they need to buy dollars, so the dollar goes up,” said Cieszynski.

The reaction in the dollar following the data was probably due to the producer-price index rather than the Empire State survey, because the latter is a micro event that can’t derail the dollar in the longer term, said Christopher Vecchio, a currency analyst at DailyFX in New York.

“I think this is a bit of an overreaction in an overextended market,” he said, adding that the headline numbers on the producer-price index could have initially “spooked” investors given the dollar’s recent strength.

The ICE dollar index is up 2.6% in May and 5.1% in 2013 so far, according to FactSet. The dollar has climbed in part on expectations that the U.S. economic recovery remains on track, given better-than-expected U.S. labor-market figures and a rebound in retail sales.

Also supporting the dollar was data that showed home-builder confidence rose in May after declining for three months, according to the National Association of Home Builders/Wells Fargo housing-market index. The housing rebound has been a driver of the U.S. economic recovery, and a rebound in confidence is positive for the dollar, said Vecchio.

An improvement in payrolls growth in the last six months is among the reasons Philadelphia Federal Reserve President Charles Plosser said Tuesday he wants the Fed to slow the pace of buying $85 billion a month in bonds before it completely winds down the program. Plosser’s remarks came after The Wall Street Journal late last week reported the Fed has mapped out a strategy for putting to an end to its bond-buying program.

The Fed’s bond buying aims to boost economic growth by holding long-term interest rates down, which would hurt the appeal of the dollar’s yield.

Europe’s Biggest Economy to be U.K.

Way back in 1987, the Italian government had a rare moment of economic success to celebrate. The Italian economy had overtaken Britain’s in total size. It was known in Italy as Il Surpasso, and became a symbol of national pride.

Through the 1970s and 1980s, the Italian economy had grown strongly, while the U.K. had stagnated and almost collapsed in the 1970s and early 1980s.

Unfortunately for Italy, it didn’t last.

After joining the euro, it ground to a halt, and has hardly grown since then. But it is a reminder of how the relative position of the major European economic powers changes over time, and often radically.

Another major shift in the hierarchy of wealth is under way right now. On current trends the U.K. will soon be the second largest economy in Europe. Italy and France will be left far behind. Eventually Germany will be overtaken as well.

That matters. As the biggest economy in the region, the U.K. will have greater political weight, it will attract more migrants and investment, and the London stock market will receive a much-needed boost.

The British have grown used to being gloomy about the performance of their economy, and with good reason.

True, there have been a few positive signs recently. A triple-dip recession has been avoided, and the manufacturing sector is showing some signs of life. Overall, however, there is little to celebrate. The economy is still smaller than it was back in 2008. Real wages are stagnant. The deficit shows no signs of coming under control. A huge devaluation of sterling has done little to revive manufacturing industry, and the banking system remains in intensive care.

Success is hardly the first word you would reach for.

And yet that shouldn’t blind anyone to the underlying trend. Britain is set to become the richest country in Europe. How is that possible? Well, economic performance is always relative. It is not that the U.K. is doing particularly well. The economy is struggling to grow at more than 1% a year and may do so for years to come. There is certainly no sign of a sudden acceleration of growth.

But the rest of Europe is doing much, much worse. The euro crisis has locked the continent into a permanent depression. Once you take that point on board, the math becomes relatively simple. If the rest of Europe is stagnant, or getting smaller, then the U.K. makes relative progress just by staying where it is.

Gold Futures Drop Below $1,400

Gold futures dropped below $1,400 an ounce Wednesday as the U.S. dollar strengthened, equities climbed and outflows from gold exchange-traded funds continued.

“Whatever the long run benefits of holding gold in a portfolio, the fact that both the U.S. dollar and equities are showing such strength right now tells us that now is not gold’s moment in the sun,” said Ben Traynor, chief economist at BullionVault.

Gold for June delivery fell $29.70, or 2.1%, to $1,394.80 an ounce on the Comex division of the New York Mercantile Exchange.

The contract dropped $9.80 Tuesday. It’s lost a total of more than 3% over the past four trading sessions.

July silver futures also sank 65 cents, or 2.8%, to $22.73 an ounce.

The decline in gold prices came as the U.S. dollar climbed against its major rivals, with the ICE dollar index at 83.977, compared with late Tuesday’s 83.575 level.

“Gold is directly confronting the probability that the U.S. dollar will ascend higher, taking a variety of forex signals back to days not seen since at least 2006,” said Richard Hastings, a macro strategist at Global Hunter Securities.

“This has very large implications for many things, and gold is very exposed here,” he said. When the Japanese yen selling wave began in November 2012, the risk of an extensive and prolonged impact on gold prices had to be thrown onto the table, and now we are seeing that gold prices are doing a great job of saying the USD goes higher against the euro.”

The euro dropped to a six-week low against the dollar on a closing basis Wednesday after data showed the French economy slid into a recession, with its gross domestic product slipping 0.2% in the first quarter from the three month period ended Dec. 31.

Figures released separately also showed Germany’s economy rose 0.1% during the first quarter, undershooting expectations for a 0.3% improvement.

The dollar has been shedding its haven status, rising with expectations of better U.S. economic growth and an expected end to the Federal Reserve’s quantitative easing. Those gains, combined with a broad, record-breaking rally in stocks, have curbed demand for gold as a hedge against dollar weakness and poor economic times.

The metal has fallen 15% this year.

US Homebuilder Confidence Rises

Confidence among U.S. homebuilders rebounded this month, reflecting improved sales trends during the spring home-selling season and the strongest outlook for sales over the next six months in more than six years.

The National Association of Home Builders/Wells Fargo builder sentiment index released Wednesday rose to 44 in May from 41 in April. The increase for May was the first month-to-month gain since December.

Measures of interest by prospective buyers and current sales conditions also improved from April's reading.

Readings below 50 suggest negative sentiment about the housing market. The last time the index was at 50 or higher was in April 2006.

Concerns over rising costs for land, building materials and labor dimmed builders' confidence in recent months. April's reading, which was revised one point lower this month, marked the lowest confidence level since October.

Until December, the index had been steadily trending higher going back to October 2011, when it was 17. Overall, though, it remains well above the January 2009 low of 8, adding to mounting evidence of a sustained housing recovery.

Homebuilders are benefiting from a sustained rebound in housing that began a year ago, powered by steady job growth, rock-bottom mortgage rates, rising home values and a decline in the number of homes foreclosures.

New-home sales rose 1.5 percent in March to a seasonally adjusted annual rate of 417,000, according to the Commerce Department. While still below the 700,000 pace considered healthy by most economists, March's new-home sales pace was up 18.5 percent from a year earlier.

Sales of previously occupied homes were up 10.3 percent. And for the first time in five years, homebuilders started work on more than 1 million homes in March at a seasonally adjusted annual rate.

Several major homebuilders have reported strong annual increases in new home orders for the first three months of the year, which includes the start of the spring home-selling season, the traditional peak period for home sales.

One builder, Ryland Group Inc., said Tuesday that new home orders in April jumped 59 percent from a year earlier. The builder, based in Westlake Village, Calif., saw home orders grow 54 percent in the first quarter.

"Builders are noting an increased sense of urgency among potential buyers as a result of thinning inventories of homes for sale, continuing affordable mortgage rates and strengthening local economies," Rick Judson, the NAHB's chairman, said in a statement.

The latest builder confidence index, based on responses from 290 builders, reflects the healthier sales trends many homebuilders are enjoying.

A gauge of current sales conditions rose four points to 48, the highest level since March, while a measure of traffic by prospective buyers improved three points to 33.

Builders' outlook for sales over the next six months rose one point to 53, the highest reading since February 2007.

Even so, homebuilders continue to grapple with the legacy of the housing downturn.

During the roughly six years since the housing bubble burst, some 1.4 million residential construction jobs vanished, while land development — when raw land is prepared for home construction — slowed sharply.

In addition, suppliers of building materials sharply reduced their stockpiles and have been slow in adjusting to the resurgent demand for lumber and other goods.

That translates to higher construction costs and heated competition for ready-to-build land. Many builders also are paying more for labor, because many of the subcontractor firms that builders rely on are scrambling to find experienced workers, many of which have long since moved on to other types of jobs.

In addition, many smaller builders also are having a difficult time getting loans to buy land.

Though new homes represent only a fraction of the housing market, they have an outsize impact on the economy. Each home built creates an average of three jobs for a year and generates about $90,000 in tax revenue, according to NAHB statistics.