Dollar Plunges Deeper Into Declines As Inflation Slows

The dollar took another beating Tuesday as the key US economic releases for the session failed to generate the same bullish sentiment surrounding economies like the Euro Zone and UK. Now the greenback is left in a precarious position with no critical data scheduled for the rest of the week while the majors are making fresh anti-dollar multi-year highs.

For fundamental and technical traders Tuesday, the top mover was obviously GBPUSD which broke the psychological 2.0000 level for the first time in 15 years on a near 200 point rally from overnight lows. Initially, the early dollar losses against the pound were isolated to the individual pair; but weak data from the US coffers quickly helped the other majors to play catch up. From an overnight a 30-point overnight range, EURUSD broke higher to put in a new high just below 1.3000. On the other hand, USDCHF was working on declines from the Asian session that totaled 90 points and challenged Friday’s low with a spike at 1.2065. Finally, USDJPY was working with the same anti-dollar momentum on a turn off of a 119.90 high that has sufficiently cleared out a number of technical levels.
Fundamentals continue to shape a stabilizing US economy; and under normal circumstances, a settling of economic volatility is encouraging. However, with the currencies like the British pound, euro and Japanese yen looking to benefit from rate hikes in the near future; the greenback is starting to loose its appeal in the global market. Today’s Consumer Price Index played a pivotal role in this developing outlook by tempering inflation pressures and dimming spotty speculation that the Fed may pursue another rate hike in the future. From the numerous calculations the Labor Department makes on the data, the core number shone brightest by cooling to a 2.5 percent annual pace in March from 2.7 percent the month before. The slowest pace in ten months, the deceleration clearly supports the Fed’s beliefs that inflation will continue to normalize at current rates. At the same time, the headline numbers may help to keep the Board of Governors’ hands tied on rate cuts for now. Headline inflation heated up to a 2.8 percent pace last month from 2.4 percent, in line with expectations. The key component of the pick up was clearly the 10 percent jump in gasoline prices for the period that has the duel effect of diverting income from discretionary spending.
Aside from the inflation indicators, the remainder of the day’s releases focused on growth. Ironically, the other indicators put the spot light on two of the economy’s biggest trouble areas: housing and manufacturing. The housing numbers managed to best expectations and support speculation that a bottom in the sector is in place after the biggest contractions in 15 years. Both housing starts and permits last month rose 0.8 percent to 1.518 million and 1.544 million respectively. At the same time, economists and traders are not turning to full-blown optimism on the news. The March numbers where heavily influenced by the warmer temperatures over the period. At the same time, mortgage defaults and repercussions, through regulation following the sub-prime crunch, will likely weigh on homes in the future. On the other hand, the industrial production figure for the same month is once again raising a bearish flag on the manufacturing sector. Following the dip in the ISM factor number, the 0.2 percent contraction in today’s activity indicator has lowered the bar on rebound expectations. Looking ahead, the calendar grows cold and only a few key Fed speeches will dot the landscape.
Stocks were encouraged by today’s macro releases, spurring optimism among the ranks that helped push the Dow to challenge record highs. Leading the other benchmark indices, the Dow was quoted 0.42 percent above yesterday’s close at 12,774.34 by 15:00 GMT. The S&P 500 measuring a similar move with a 0.31 percent climb to 1,473.04 while the NASDAQ Composite rose a modest 0.07 percent to 2,520.13. As the dust clears from economic indicator releases, traders are now turning to earnings to divine the next major market direction. Consumer good giant Johnson & Johnson padded the bullish ranks by beating expectations on revenues and earnings that sent shares 2.7 percent higher to $64.73. For the tech sector, which is expecting a number of key reports after the close, TD Ameritrade’s poor showing has set the tone. Shares of online broker dove 7.4 percent or $1.25 to $15.62 after missing Wall Street’s earnings estimates and lowering its outlook for the year.
Treasury traders immediately reacted to the drop in core inflation this morning by revising their outlooks for an eventual cut for the Fed Funds rate. By 15:00 GMT, the ten-year note was trading 11/32nds higher at 99-15 as its yield slipped 4 basis points to 4.690. The thirty-year instrument rallied 20/32nds to 98-14 while its own yield had also fell 4 basis points to 4.848.