The US dollar moved significantly lower on the day, as dismal economic data offset a sustained carry trade tumble. The trade-weighted Dollar index subsequently fell near monthly lows, while triple-digit losses in the Dow Jones Industrial average led to a simultaneous Japanese Yen rally.
The Euro initially lost over thirty points against its American counterpart, but the later dollar tumble led the euro to $1.3661 through time of writing. The British Pound was likewise strongly improved on the day, adding over 170 points off of intraday lows to $2.0213. A drop in international equity indices made the Japanese Yen one of the biggest gainers through the period, with the dollar losing ¥1.25 to ¥115.05.
Morning economic data doomed the US dollar to extended declines, with Pending Home Sales showing record drops through the month of July. The 12.2 percent month-over-month tumble served to further worsen outlook for the real estate market and closely-linked consumer spending. Indeed, interest rate markets showed their disappointment by sending implied future yields significantly lower through the morning, with the Eurodollar December contract yielding a mere 4.91 percent. The Eurodollar contract settles to the three-month London Interbank Offered Rate for the US dollar, which currently stands at a whopping 5.78 percent. The near 90 basis point difference between implied December rates and the current LIBOR emphasizes market expectations for interest rate cuts by the US Federal Reserve. Yet other markets seem somewhat unconvinced that the Fed is likely to act at its upcoming September 18 meeting.
The Dow Jones Industrial Average continued its sell-off following the release of the key Federal Reserve Beige Book through the afternoon, as speculators seemed less sure that the Fed would cut rates through the end of the year. The central bank governors reported moderate growth within their respective districts, with labor markets reportedly tight in many districts of the economy. In fact, overall price pressures were likewise thought to be unchanged through the period?leaving a roughly balanced assessment of inflation and growth. Equity markets responded by sending stocks lower through the short term, as many speculators fear that the Fed will leave rates at 5.25 percent in the absence of a slowdown in growth. Given the recent credit market crunch, many expected the central bank to ease pressures on the economy through monetary policy accommodation. Yet inaction would surely doom equities to further drops, with the highly leveraged forex carry trade likely to follow.
Stock markets fell throughout the day, leaving the Dow Jones Industrial Average 170 points off to 13,279. The S&P 500 was similarly sold, shedding 1.3 percent to 1,469. The NASDAQ Composite was the smallest decliner at -1 percent, leaving the index at its strongest 5-day performance since 2003.
Government Treasury Bonds were unsurprisingly bid through the afternoon, with the 2-year note adding an impressive 7/32 points to 99 and 31/32. Yields on the shorter-term debt fell further from previous heights, resting at the psychologically significant 4.00 percent mark through time of writing.
Written by David Rodriguez, Currency Analyst for DailyFX.com
?