Dollar Struggles For Modest Gains On Hawkish Revision To Labor Inflation

The US economic calendar reverted back to its second and third tier indicators leading the national currency to consolidate against the more active majors. Then again, though most of the headline pairs were holding their broad ranges, the dollar was receiving quiet bid interest as an upward revision to the Unit Labor Cost index added a solid foundation to the recent rebound in expectations for a possible Fed rate hike.

For EURUSD, the pair made a lower intraday high of 1.3535 in the overnight as it slowly carved its way through 1.35 on its way towards the range low of 1.34. The stall in dollar declines has shored up volatility in USDCHF, leaving it in a 40-point congestion band below 1.2190. The other carry favorite, USDJPY, retained some its selling momentum with the dollar giving up 60 points to the Japanese yen in a quick dip below 121. Finally, the risk in tomorrow?s BoE rate decision kept GBPUSD is an unusually tight, 45-point band above 1.9910 - looking like a breakout in the making.
Dollar activity was once again based on a mix of low level economic indicators and concerns over low volatility and interest rate expectations. Starting with the easily accessible calendar, there was not a top market mover in sight; though each of the minor indicators made a relatively big statement when they hit the wires. Starting with the battered housing market, the MBA mortgages applications read for the week ending June 1st printed a 1.7 percent correction that pushed the index to a new three-month low. Looking a little deeper into the data, refinancing dropped 6.3 percent over the same period to mark the low for the year. Following up on this data and Fed Chairman?s ruminations yesterday, the National Association of Realtors said in a press statement that it expects the decline in home sales and prices to be steeper than expected through 2007. Switching gears, to inflation, FX analysts had a final revision on productivity and labor costs for the first quarter to work with. The final reading on nonfarm productivity was a non event as it was adjusted to a slower 1.0 percent pace on the quarter as expected, though the annual measurement?s near, 11-year low begs the question of how threatening could inflation be. The Unit Labor Cost index had something to say about that. The recalculation on the first quarter number was triple the previous print at 1.8 percent, suggesting inflation in the labor market is still a concern. This is an interesting statistic given the steady rise in short-term yields that implies growing confidence that the Fed will stay pat this year.
Looking beyond the calendar, there were a few other events for those interested in the dollar to be concerned with. In Fed activity, perpetual hawk Jeffrey Lacker, president of the Richmond Fed, gave his impressions on the economy and economic policy this morning. Though he is not a voter on the FOMC this year, his rhetoric remains the rally call for hawks as he recounted his expectations for a rebound in growth to its noninflationary potential by year end, as core inflation hovers around 2.0 percent. Kansas City Bank President Hoenig will deliver his own observations on the same topics later today. From the higher echelons of policy officiating, the G8 meeting in Germany may hold greater sway over exchange as highlights leak out into the media - even though officials said the final communiqué would not address FX fundamentals. Finally, the dollar - along with every other major currency - will tune into the many rate decisions scheduled around the world. Today, the ECB announced a 25 basis point hike in its benchmark lending rate to 4.00 percent, closing the dollar?s yield advantage to 125 basis points. The RBNZ and BoE are notables for the day ahead.
US equity investors were spooked by the combination of a global sell recommendation on stocks by a major bank, big declines in European indices and the threat of an extension on the Fed?s neutral stance. At 15:20 GMT, the Nasdaq Composite was pacing broad market declines with a 0.8 percent plunge to 2,590.36. The S&P 500 wasn?t far behind with a 0.71 percent drop to 1,520.08 while the Dow was working on a 0.68 percent drawdown to 13,502.81. Though there weren?t many new, confirmed deals in the equity ranks, there was some chatter that excited unsystematic price action. Some big name deals in the financial services urged two hedge funds with a stake in TD Ameritrade to recommend the broker find a merger partner. Shares of TD responded with a sharp 3.5 percent pickup to $20.65. While new deals keep coming down the assembly line, what about those that hit a snag? Whole Foods Market?s plans to envelope Wild Oats may have hit a road bump with the Federal Trade Commission filing a lawsuit to block the merger. Shares of Whole Foods dropped 3.5 percent to $39.08 on the news.
Treasury yields finally took a breather from pushing fresh 9-month highs as traders sat on the sidelines until all the central bank activity outside of the US cooled. The ten-year note was up 5/32nds at 96-11 with a yield light two basis points at 4.968 by 15:20 GMT. The thirty-year bond similarly climbed 5/32nds to 95-00 while its own yield shed a basis point to move to 5.076.