Dollar Selloff, Euro Rally Show Few Signs of Slowing

The US dollar fell yet again, setting fresh record-lows against the euro and parity against the Canadian dollar. Greenback weakness continues to dominate financial markets, with similarly pronounced moves in dollar-sensitive gold and oil prices. Given overall downward momentum, there seems to be little in the way of further greenback tumbles.

The euro surged to fresh record highs of $1.4097 through New York session trade?blowing through stop orders and option barriers with force. Yet the main story was a similar rally in the Canadian dollar, which reached parity with its US namesake for the first time in over 30 years. The USDCAD currently trades at an impressive C$1.0010 after a 150 point decline. The British Pound saw a much smaller rally against the dollar, as worries over UK financial stability continued to depress the sterling against major trading counterparts. Yet dollar weakness sent Cable 90 points off its daily open to $2.0096.
Speculators continued to ignore domestic economic data, as traders were more-than-willing to send the euro higher and dollar lower on overall momentum. Arguably the biggest news on the day came on rumors that the Saudi Arabian government would drop their domestic currencyÂ’s peg to the dollar?eliminating its need to hold tremendous reserves in the US currency. Such speculation came on the fact that the Saudi central bank declined to cut rates in lockstep with the US Federal Reserve. But many argue that the Saudi monetary policy authority was simply acting against rampant inflation and played down the possibility of a break of a change in the currency regime. US Treasury bond markets nonetheless fell in the wake of the report, with fears that Middle Eastern countries would look to sell their reserves in domestic debt.

On the US economic front, markets witnessed a further deterioration in the closely-followed Leading Indicator?falling more than expected at -0.6 percent in the month of August. A breakdown of the headline figure shows little signs of hope, with virtually all sub-indices registering declines through the period. Notables included a worsened Consumer Confidence coefficient, as well as worsening Jobless Claims numbers and a deterioration in Building Permits. Markets showed little concern on the figure, as much of the data had previously been reported. Yet it remains relatively clear that many broad measures of economic health reflect a dim outlook for the future of domestic expansion.
A later Philadelphia Fed manufacturing report showed a slightly more optimistic picture of regional industrial production, with the headline index printing far above consensus estimates for the month of September. Surging Prices and a surprising jump in New Orders boosted the overall index to its highest since June. This is one of the few positive US economic indicators seen through recent trade and may calm concerns over the future of industrial performance. Yet there remained some concerns among Philadelphia manufacturing firms, with the Number of Employees index falling from 21.2 in August to 7.5 in July. The employment figure remains strongly above medium term trends, but it nonetheless echoes the slowdown in payrolls growth throughout the broader economy.

US equity markets gave back some of their gains as a surge in Treasury yields offset renewed optimism on borrowing costs for domestic corporations. The Dow Jones Industrial Average shed a relatively minor 50 points to 13,766, but the broader S&P 500 lost 0.7 percent to 1,519.

Speculation that Saudi Arabia and other Middle Eastern countries would sell US government debt sent Treasury yields significantly higher on the day. The long-dated 30 year Note added an incredible 12 basis points in yield to 4.96 percent. Given that these yields serve as a benchmark for many mortgages and other loans, any sharp advances could worsen market credit conditions. The shorter-dated 2-year likewise saw a large tumble in price, with its yield up 12bp to 4.1 percent.

Written by David Rodriguez, Currency Analyst for DailyFX.com
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