If it were up to the indicators on the economic calendar this morning, the greenback would have sold off early. However, selling on the greater than expected swell in the trade deficit was temporarily held off by encouraging statements on the dollar and foreign investment in the US by the Treasury Secretary and the President.
Epitomizing the underlying strength of the dollar, EURUSD slipped below 1.35 and made a five-week low through the effort. Perhaps the more impressive break in the greenback?s favor came from GBPUSD which fell over 150 points from overnight highs to 1.9805. The dollar?s performance was less impressive against the low yield currencies. USDJPY rallied back to 120.55 for a double touch on resistance before pulling back to 120 to keep the pair?s broad range in place. Finally, USDCHF was struggling to break free of its own congestion band as it bounced between 1.2160 and 1.2215 resistance.
Finally, a jump in volatility across the majors came with some direction. This morning, the currency market (not just the dollar) was abuzz with two central bank meetings, data from the US calendar and unexpected commentary from a few high ranking officials. Making things very confusing for traders, all of this hit the markets around the same time. The first - and arguably most influential - wave was formed after the ECB and BoE rate decisions. For the currency market, the two policy meetings were the key events for the week. Expectations for both gatherings were riding high as the Bank of England was predicated to raise rates 25 basis points with a chance at going 50 basis points; and analysts forecast the return of strong vigilance? into the European Central Bank?s repertoire. In the end, both events played out according to plan; but markets were pricing in a little more on both sides to the risk. When both policy groups followed through with expectations (like the FOMC), risk coverage had to be unwound. This was one reason why the dollar was able to mark up bigger moves against the euro and pound compared to the yen and franc.
While the central bank decisions certainly helped the dollar along, its advance was finding fundamental support from within the US boarders. This morning, President George W. Bush and Treasury Secretary Henry Paulson were both making financial headlines. In an interview with CNBC, Paulson recited a few familiar phrases. For dollar traders, his insistence that a strong dollar is in our nation?s interest? confirmed his title as the currency?s biggest cheerleader. More unusual was President Bush?s address in which he said his administration will try to lower to trade barriers in an effort to attract foreign investment. Both of these comments were encouraging enough for the greenback, that the data that hit the wires around the same time didn?t cull the dollar bid. Sifting through the second and third-tier indicators released all at 12:30 GMT, the trade account for March surely stood as the greatest obstacle for the dolls strength. According to the Commerce Department, the deficit hit a six-month low $63.9 billion. Breaking the data down, imports saw their biggest jump since November of 2002 to set a new record $190.1 billion outflow. Energy products certainly accounted for more than their fair share of the pressure with rising prices lifting the value of petroleum imports from $20.9 billion to $24.6 billion. The indicator was not all bad though. Exports hit their own record highs and the shortfall with China contracted for the month.
Looking ahead, it is difficult to predict how long the dollar bid will last. The fledgling advance could certainly be in jeopardy with tomorrow?s retail sales number. Already a top rung market-mover, periphery data sales data released in recent days seems to be setting the government number for a serious, negative surprise. A few days ago, the Fed-monitored Redbook reported a big 4.1 percent drop in sales for the month of April. More concerning, a number of firms released their sales figures, like Wal-Mart who reported a 3.5 percent drop for the month. And to wrap it all up, the ICSC Chain Store Sales reported the biggest drop since records began in 1984.
The equities market was just as volatile as its currency counterpart as disappointing sales figures from a number of firms roused a much needed deep sell off after a series of record highs. By 15:45 GMT, the NASDAQ Composite was leading the decline with a 0.8 percent drop to 2,555.69. The S&P 500 was working hard to catch up with its own 0.68 percent decline to 1,502.26 while the Dow fell 0.61 percent to 13,280.95. The momentum behind this broad selling was likely rooted in the disappointing sales numbers from firms like Wal-Mart and The Gap. Shares of clothing retailer The Gap fell 1.4 percent or $0.26 to $18.17 after the firm announced a 17 percent plunge in sales that was more than twice what was expected. Elsewhere, earnings numbers from grocer Whole Foods pummeled the firm?s stock into the top mover?s list. After announcing an 11 percent drop in profit for the quarter, shares of Whole Foods collapsed $5.23 or 11.4 percent to $40.57.
Though traders could have referenced a number of events or indicators today to revise their rate projections, Treasuries were little moved by 15:45 GMT. The benchmark ten-year note was trading 2/32nds higher at 98-25 as its yield shed a single basis point to move down to 4.652. Bonds were just as subdued with a 5/32nds percent decline to 98-26 pushing yields a basis point lower to 4.825.