The dollar and euro got a boost versus the yen on some promising U.S. manufacturing data Friday morning, but the overall market tone remains risk-averse and they are down on the day. The Federal Reserve Bank of New York's Empire Manufacturing Survey showed conditions for New York manufacturers deteriorated only modestly in May, increasing hopes the U.S. economy is on the mend. Another report showed U.S. industrial production tumbled less in April than economists expected. These reports helped riskier trades recover a portion of their overnight losses, but not completely. The dollar gained as high as Y95.57 recently and the euro rose to Y129.45 and $1.3575 - still short of intraday highs on a broad retreat in riskier assets. Sentiment was struck by a worse-than-forecast retail sales report in New Zealand - a reminder that the economy has yet to hit bottom there - and grim gross domestic product data out of the euro zone. "However, the price action needs to be placed in larger context," say Brown Brothers Harriman analysts. The risk-sensitive currencies have been bouncing for days after a week of significant advances. "A key problem for foreign exchange markets is that positioning in recovery plays has risen but neither the macro data nor interest rate markets are providing new direction for this trade," said analysts at Credit Suisse. Market caution is supporting the yen, as is an encouraging data report out of Japan. Japan's March machinery orders fell less than expected as demand rose among key exporters such as car and electronics makers after months of declines. Overnight, the dollar fell to its lowest level since March 20, eight weeks ago, Y94.78. The euro fell to its lowest level in two-and-a-half weeks, Y128.38. Friday morning in New York, the euro was at $1.3570 from $1.3640 late Thursday. The dollar was at Y95.48 from Y95.77, according to EBS. The euro was at Y129.54 from Y130.60. The U.K. pound was at $1.5277 from $1.5234. The dollar was at CHF1.1083 from CHF1.1045 late Thursday. First-quarter German gross domestic product recorded its sharpest contraction since records began in 1970, as economic activity was much weaker than expected. Overall euro zone GDP suffered its biggest contraction since records began in 1995. Emerging European currencies, like Poland's zloty, are also declining with the fall of risk appetite Friday, and are approaching key technical levels that could lead to a sharper fall. The head of the Czech National Bank confirmed Friday that the European Central Bank has sent a letter to a number of its central European counterparts ruling out the use of government bonds from the region as collateral in its refinancing operations. A number of central banks have asked in order to inject euro liquidity into their financial systems. But the ECB said it will consider entering into currency swap arrangements on a case-by-case basis, central bank Governor Zdenek Tuma told reporters on the sidelines of the European Bank for Reconstruction and Development's annual meeting in London. Tuma added that the Czech central bank doesn't itself plan to ask for a swap arrangement. Canada Morning The Canadian dollar is lower in line with a more risk-averse market temperament early Friday, and is generally expected to continue its recent pattern of range-trading and consolidation ahead of a long weekend holiday in Canada. There has been limited market reaction to Friday's run of Canadian and U.S. economic data, including news of a surprise 2.7% drop in Canadian March manufacturing sales. Currency strategists at National Bank in Toronto said that "given the factors at play a fair amount of intraday volatility should be expected" for the U.S.-Canada pair, while suggesting that from a technical perspective the pair remains a range trade until it can break on either side of the 1.1922 or 1.1465 regions. Friday morning, the U.S. dollar was at C$1.1710, from C$1.1688 late Thursday.

Source