Dollar Put In Steep Correction Despite Strong GDP, Optimistic Fed

Though forex traders were focused on the headline GDP number Wednesday morning, market expectations and separate indicators took control of the dollar yoke. Leading into the active session, it seemed the entire market had positioned itself for a better than expected fourth quarter growth print, but this consensus and a disappointment in Chicago manufacturing opened the door for swift dollar declines.

From the majors, EURUSD led the way after catalyzing an eventual 110-point dollar sell off after a 1.2925 low. Mirroring the euro, the Swiss franc rallied 145 points off of a false break on resistance up at 1.2575. The slow USDJPY retracement accelerated on the dollar drop putting in for a 110 point drop to 120.65. Finally, the early dollar advance in GBPUSD to 1.9485 turned quickly after the news hit the wires, leaving the haze of a 190-point rally to linger.
In one day, claims that the dollar hasn’t seen any newsworthy data in weeks have been completely drowned out. Heading into the session, investors in the US markets were tuned in specifically to the advanced reading of fourth quarter GDP. With a consensus of a 3.0 print, the market received a mild shock with an actual acceleration to a 3.5 percent clip. Looking to the components of the broad gauge, the ups and downs of the economy came as expected. In the final three months of the year, consumers carried the economy with a 4.4 percent rise while receiving a helping hand from exports and government spending. Conversely, a continued drop in the housing market and somewhat unexpected contraction in business investment held growth back. In fact, residential investment plummeted 19.2 percent in the quarter to subtract 1.2 percentage points from the gauge, the most in 16 years. Meanwhile corporate investment fell for the first time since the opening months of 2003.
While the immediate reaction in the currency market to the GDP numbers was modest, those that left their screens after the report missed the volatility that followed. The real action began a little more than an hour later when the Chicago Purchasing Managers Index came across the wires. Though this indicator barely cracked the list of the top five indicators to watch for the day, it proved the most market moving. According to the National Association of Purchasing Management, factory activity in the Chicago area contracted in January for the first time since April of 2003. This follows a similar drop reported in Philadelphia last month and a sharp deceleration in the Empire read for January. All of these regional indicators suggest a drop in the national ISM manufacturing read could be in store tomorrow, which could quickly erode confidence in the dollar.
Later in the day, the fundamental drive only increased. Providing a layover for those traders waiting after the GPD report and before the Fed announcement, Secretary Henry Paulson’s testimony to the Senate Banking Committee held some sway over the majors. From his prepared speech and the Q and A session afterwards, the key points was Paulson’s supporting the Treasury’s decision not to label China a currency manipulator and the suggestion that he would not join European officials at the G8 in pressuring Japanese authorities to firm up the yen. The last serious move for the day was reserved for the FOMC rate decision. Holding the Federal Funds rate at 5.25 percent as expected, the real interest was in the brief statement that followed. Remarks pertaining to ‘signs of stabilization’ in the housing market were offset by the mention of moderating inflation gauges. When push comes to shove though, worries over the economy gave way to easing inflation, leading traders to neutralize their interest rate expectations for the future.
The benchmark stock indices were off to a slow start this morning, despite a number of key earnings reports; but the Fed statement finally put a spring in the market’s step. By 20:30 GMT, the Dow led with a late break, 0.99 percent rally to a new record 12,647.88. Not far behind, the NASDAQ Composite followed up with a 0.85 percent run to 2,469.40 while the S&P 500 moved 0.8 percent 1,440.89. Among the number of earnings reports this morning, Boeing and Altria’s offered a blue-chip view. Aircraft maker Boeing Co. printed better than expected numbers to lead a 4.3 percent rally in share price to $89.69. Spreading the green to a different sector, Altria Group Inc. announced better earnings, raised its 2007 guidance and issued a hard date for its Kraft Foods spin off. Shares of Altria were 0.2 percent higher on a $0.20 climb to $87.70.
Like stocks, treasuries made their move late. The ten-year note rose 12/32nds to 98-15 while yields slipped 5 basis points to 4.820 by 20:40 GMT. T-Bonds jumped 26/32nds to 93-17 as yields slipped 6 basis points to 4.921.