The US dollar continued to tumble through late-week currency trading, with plummeting US Treasury Bond yields forcing strong reversals on an earlier rebound. Forex speculators initially allowed the greenback to regain ground through the early morning London session, but disappointing economic data sunk the currency near record-lows through the New York afternoon. A sharp rise in risk aversion on Dow Jones Industrial Average tumbles was not enough to discourage aggressive dollar sell-offs.


The British Pound once again dominated currency trading market headlines, setting fresh 28-year peaks of $2.0867 through time of writing. Momentum traders likewise showed little hesitation in pressing the euro near recent record-highs, but the single currency was unable to climb yesterday’s peaks above the key $1.4500 mark. Strong sell-offs in US stock markets led risk-averse traders to scale back Japanese yen short positions—making it the largest gainer on the trading day. The dollar lost 0.60 yen to 114.86 through time of reporting.
Disappointing US economic data added further gloom to growth outlook, with key Personal Spending and ISM Manufacturing reports falling below consensus forecasts. Consumers saved more and spent less through the month of September, and the Personal Savings rate matched 6-month highs of 0.9 percent. A simultaneous Jobless Claims report showed above-trend layoffs forced 327,000 new claims for unemployment insurance in the week ending October 27. The level of Continuing Claims subsequently jumped to 2.588 million and suggested that job creation remained muted in the world’s largest economy.
An improvement in the Employment index of the ISM Manufacturing report somewhat improved prospects for job creation, but a tumble in the headline index showed that sector growth has slowed to match 2007 lows. Analysts expected that the key ISM figure would post a modest decline to 51.5, but a sharp deterioration in Production levels and New Orders sunk the headline index to 50.9. At just 0.9 points above the key expansion/contraction mark, the report confirms fears that growth continues to slow across key sectors of the economy. Though Manufacturing comprises a relatively minor share of US GDP, it remains clear that falling demand threatens to harm all facets of the world’s largest economy.
Stock markets posted significant declines on the afternoon, completely erasing yesterday’s post-FOMC rate decision rally and leaving the Dow 191 points down to 13,739. Worries over market titan Citigroup fueled strong sell-offs in the key financial sector, and broader issues clearly followed with the S&P 500 1.3 percent lower to 1,529. The NASDAQ Composite took the dubious distinction of the most moderate loser on the day, 1.0 percent off of yesterday’s close to 2,830.
US Treasury Bond yields posted substantial declines on the afternoon, as an apparent shift in overall interest rate expectations fueled demand for fixed income issues. The 2-year Note shed an incredible 16 basis points in yield to 3.78 percent, while the 10-year Note was similarly volatile at -11bp to 4.36 percent. At first glance it would seem that a sharp rise in risk aversion forced investors to the unrivaled safety of US Government debt, but very similar price action in money market yields suggests that fears of economic slowdown are forcing rates of return lower across the board.
Written by David Rodríguez, Currency Analyst for DailyFX.com