Dollar Rises Alongside A Strong Spending Number, Trade Dispute Still Armed

Despite spotty performance among the majors, the dollar was forging higher Wednesday morning with the aid of a strong consumer spending report. However, the greenback?s gains have been capped while the market waits for policy officials and politicians to deliver their respective reports.

For price action, EURUSD slowly worked its way below 1.33 and on to 1.3260 through the Asian session, though a US session rebound has since taken the pair off these lows. A little more volatile, GBPUSD took a break from its recent rally to retrace over 100-points from yesterday?s high to a range 1.9675 low. Taking the yield angle on the dollar?s strength, USDJPY surged over 100 points from overnight lows to test 122.45 and put in a new four-year high at the same time. Catching some of the yen?s draft, the Swiss franc quietly slipped another 55 points against the dollar to bring the tally on the bullish run to 5 days and 300 points.
After two days of speculation and questionable indicators, the US economic calendar was once again contributing to price action. Though there was a number of releases gracing the newswires, traders took specific interest in the retail sales report. With growth and labor trends still up in the air, pessimists have been looking for that key disappointment to show the consumer support pillar is collapsing from underneath the economy. Today?s spending report helped fend off bears. According to the government?s numbers, the rise in retail sales doubled the market?s expectations on a 1.4 percent increase last month. It was hard to find a disappointing slant to the data. Gasoline receipts rose 1.2 percent, but when they were excluded from the headline number, sales still saw its biggest jump in 16 months. Other notable changes came from the auto group which reported a 1.8 percent in purchases and a 2.1 percent pop in building material sales. This should help to reinforce expectations for the Fed to hold rate steady for the time being.
If the spending number was the solitary event for the day, price action could have turned out quite a bit differently. However, as it happens, there was much more for dollar traders to worry about. Event risk was emanating from Washington this morning as the Treasury Department released its semiannual report on trade and exchange-rate policy. As was expected, Treasury Secretary Henry Paulson reaffirmed his position that the yuan is undervalued and Chinese officials should take steps to hasten its policy towards a free float - though once again falling short of labeling China a currency manipulator. The report stated that it was not clear whether the yuan was being depressed to afford the country a trade advantage; so they could not brand the nation a manipulator and, in doing so, allow the US government to pursue sanctions. While it seems Secretary Paulson is determined to put the building protectionist agenda off course, he may not be able to stem the tide in Congress. A group of senators is expected to introduce legislation later today that would force the government to take a more hard-line stance on China - perhaps encouraging officials to file a WTO dispute settlement charge. This is among the markets top concerns. In the anticipation though, the market will make sure not to overlook the Fed?s Beige Book. Given the steep turn in the interest rate curve and waning speculation surrounding a Fed rate cut this year, any inflation in hawkish rhetoric or bullish outlook for struggling economic sectors could embolden the dollar?s rise.
The breath of life in consumer spending helped turn US equities back on the upward path. By 15:25 GMT, the broad S&P 500 Index was taking the lead with a 0.5 percent climb to 1,500.49. Not far behind, the Dow was trading 0.46 percent higher at 13,356.11 while the Nasdaq Composite rose 0.46 percent at 2,560.46. Going with the flow, Alcoa shares was the banner mover for the blue chips as shares rose $0.68 or 1.7 percent to $40.02 on news its downed production line at its Tennessee operation is slowly coming back on line. The firm has said that the production halt in the Tennessee branch and a line in Texas would cut some $45 million from second quarter profit. From aluminum to movies, Blockbuster received an upgrade from Citigroup as the firm concluded that the high price of Blockbuster?s combined online and brick-and-mortar model was now reflected in price. Shares jumped 10.1 percent to $4.35.
With yields on the benchmark T-note at four-year highs, investors have taken on a renewed interest in treasuries. The ten-year note jumped 16/32nds to 91-19 by 15:25 GMT which in turn pushed its yield 7 basis points lower to 5.225. At the same time, the thirty-year bond surged 1-6/32nds to 91-19 while its yield dropped 9 basis points to 5.315.