The US dollar fell for the second round of trading this week as fresh economic data spurred stagflation concerns, and led the Canadian dollar to pick up the biggest gain against the greenback. The appreciation supported a minor rise in the high yielding Australian and New Zealand dollar as the pairs rose to 0.943 and 0.755, respectively. On the other side of spectrum, the low yielding Swiss franc strengthened to close above 1.04, and was followed by the Japanese yen as it close just under 108. Expectations of a rate hike next month supported the euro to close above 1.55, while the British pound was the only currency to decline against the greenback as the pair dipped to 1.955.
Rising commodity prices raised concerns that the US economy may fall into stagflation as housing starts fell to a 17 year low of 975K from 1008K in April amid a rise in producer prices. The jump in commodities has led the headline figure to rise for the eighth consecutive month to 7.2 percent from 6.5 percent, while the core measure continued to hold at 3.0 percent. The Labor Department also added to the slew of downbeat data as they highlighted a less than expected rise in industrial production to -0.2 percent from -0.7 percent, with productivity cooling to 79.4 percent from 79.6 percent.
A statement by Goldman Sachs spurred bearish sentiment in the stock markets as the giant investment firm forecast the banking sector to raise an addition $65B in new capital to offset the losses incurred by bad loans. As a result, the DJIA 108.78 points to 12,160.30 points, with 27 of the 30 components declining. The broader S&P500 dipped 9.21 points to hold off at 1,350.93 points amid 231 stocks falling to a fresh 52 week low.
The lack of improvement in the housing sector paired with mounting pressures in the financial sector increased the appeal of US Treasuries, and led many risk adverse investors to seek the safety of risk free bonds. As a result, the benchmark 10-Year yield fell to 4.209 percent from 4.269 percent, while the 2-Year yield plunged to 2.907 percent from 3.044 percent.
Looking forward, the MBA mortgage applications index is the only scheduled release for the US tomorrow, but market participants expect increased volatility for the US dollar on Thursday as Fed Vice Chairman Donald Kohn is scheduled to testify at a Senate hearing. The leading indicators index is also due out for release on Thursday, with economists forecasting the index to stall to 0.0 percent from 0.1 percent in April.