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Prospects Daily: Developing-country currencies weaken…Consumer price inflation rises in the US and UK…FDI into China up slightly

Global Macroeconomics Team's picture
Financial Markets…The dollar rose against the yen for a second day on Tuesday, appreciating 1% to 95.40 after sliding to a two-month low of 93.75 last week, as investors waited for clarity of the future of the U.S. monetary stimulus program from the Federal Reserve. While many speculated the Fed will slow the pace of its bond purchasing program, most expect higher interest rates as distant event, and this partly explains the greenback’s rise against Japan’s currency.

Developing-country currencies weakened, led by Indian’s Rupee and Russia’s rubble, as investors remained uncertain about the course of the U.S. monetary policy but are adjusting to the prospect of early ending of stimulus program. The rupee tumbled 1.5% versus the dollar to 58.77, nearing a record low of 58.99 reached on June 11, while the rubbles sank 1.1% against the central bank’s dollar-euro basket, the most drop in two months.

Thailand’s shares fell the most among Asian stock markets today, with the benchmark SET Index tumbling 3%, amid capital outflow concern. Foreign investors sold a net $1 billion of the country’s stocks thus far this month, the biggest monthly drop since August 2011. In contrast, benchmark indexes for the Philippine and Indonesia rallied on the country specific factors, advancing 2.8% and 1.4%, respectively.

High-income Economies…New housing construction started in the US rose 6.8% (m/m) to a 914,000 annualized rate in May (+29% on a year-on-year basis), in further indication of a housing market recovery.

US consumer price inflation rose to 1.4% (y/y) in May from a 2½ year low of 1.1% in April. Prices rose 0.1% (m/m) in May as a decline in food prices was offset by higher electricity and natural gas prices. In a sign of firming demand, core prices rose 0.2% (m/m) and core inflation remained stable at 1.7% (y/y), below the Federal Reserve’s 2% target.

Inflation in the UK rose to 2.7% (y/y) in May from 2.4% in April, mainly due to a record 22% (m/m) increase in airfares. Inflation remains above the Bank of England’s 2% target. Core inflation also accelerated to 2.2% (y/y) from 2.0% in April.  

German business confidence rose in June, with the ZEW index of investor and analyst expectations rising to 38.5 from 36.4 in May, adding to signs that a recovery Europe’s largest economy is gathering pace.

Developing Economies…East Asia and Pacific: FDI into China’s rose 0.3% (y/y) in May to $9.3bn, up from April’s FDI of $8.4bn. For the first five months of the year combined, FDI increased 1% compared with the same period last year. Meanwhile, China's overseas direct investment climbed 20% (y/y) for the first five months.

Europe and Central Asia: Russia’s industrial production shrank for the first time in three months at output declined 1.4% (y/y) in May, down from a 2.3% (y/y) increase in April, reflecting a slump in foreign demand and weak domestic spending.

Middle East and North Africa: Tunisia’s tourism showed improvements in May with revenues rising 3.7% (y/y) and number of visitors leaping 10.4% (y/y). However, the tourism revenues as still down for the first five months combined (-1.2% y/y), while number of arrivals is barely up (+0.5% y/y).