The US dollar continued to rally to fresh two-month highs against the euro and other major currencies, as traders showed little willingness to hold onto dollar shorts ahead of year-end celebrations. The rally began on an overnight sell-off in major Asian equity markets, with Hong Kong’s Hang Seng index losing a sizeable 3.5 percent and forcing a similar carry trade unwind. Continuation in stock market sell-offs through the later London trading session allowed for a further dollar advance, but greenback momentum finally slowed as North American traders took their seats through the New York open. Impressive Current Account and Net Treasury International Capital Flows results boosted the greenback’s prospects, but the news was not enough to push the buck to fresh heights. The national Current Account Deficit shrunk to its smallest in two years through the third quarter, while foreigners invested a net $114.0 billion in domestic securities through October. The Current Account result was largely expected, as a noteworthy decline in monthly trade balance deficits allowed the balance of payments to stabilize through the period. Yet the subsequent TIC’s report was very much unexpected—with the sharply positive surprise beating even the most optimistic of economist forecasts. A surge in foreign private investment into US capital markets was the driving force behind the positive surprise, but sovereign buying interest actually moderated through the period. Indeed, sovereign entities bought a mere $21.8B in US securities—a number that paled in comparison to a $94.0B buying binge by private interests. The results suggest that foreigners have not lost their appetite for downtrodden US equity and fixed income markets. Yet it will be important to see whether this trend will continue through subsequent months, with a further deterioration in financial market conditions to undoubtedly damage foreign interest in US asset classes. So far the news is bullish for the US dollar, but a tepid reaction the release highlights forex traders’ indifference to October TIC’s results.
[I]Written By: David Rodriguez, Currency Analyst for DailyFX.com[/I]