Traders were out to sell the US dollar today and nothing could stand in their way. Stronger than expected manufacturing sector growth only helped the dollar rally a mere 15 pips against the Japanese Yen, and even those gains were lost shortly afterwards. The move in the US dollar indicates that the foreign exchange market is focusing almost exclusively on bond yields today.
Ten year yields are back below five percent, which is the lowest that yields have fallen to in three weeks. The drop in yields is indicative of risk aversion, profit taking ahead of the US Independence holiday and concern that the remainder of the US data due for release this week will be dollar negative. The heightened threat of terrorism in the UK and the US has caused a rise in risk aversion that can not only be seen in currency prices, but also gold prices. This week, there is a decent chance that we will begin to see softer US data. Even though manufacturing ISM increased from 55 to 56, the prices paid and employment components of the report both deteriorated in the month of June. Factory orders and pending home sales are due for release tomorrow. Having seen durable goods, new and existing home sales, chances are definitely in favor of weaker numbers. Although the dollar could fall further on the disappointments, don?t expect a full fledged collapse (120 will most likely hold in USD/JPY while 1.37 should still be resistance in the EUR/USD) because the strong rally in US stocks and continual rise in oil prices will keep inflationary pressures a problem for the Federal Reserve even if the US economic outlook worsens.