After holding onto its gains for the past week, the US dollar finally came under pressure today, It fell against the Euro, the Japanese Yen, the Australian, New Zealand and Canadian dollars. The only currency it did not drop against was the Japanese Yen, which benefitted from overall carry trade demand. Does this mean that the rally in the dollar over? Probably not. Despite the rebound in the EUR/USD today, the currency pair still remains within its 1.43 to 1.45 trading range. Even the AUD/USD and NZD/USD are capped below resistance. Next week, trading should be exceptionally quiet which means that a break of these resistance levels is unlikely.
According to the latest reports from the Commerce Department, the US consumer spent more than they had made during the month of November, with personal spending rising by 1.1 percent and personal income rising by only 0.4 percent. This caused personal savings to dip into negative territory for the first time in 15 months as disposable income fell to -0.5 percent. Lowered savings and increased spending is not a promising recovery strategy for a country which already has huge government deficits, but the Commerce Department stated that the increase in spending was a much-needed boost for the dragging economy. US consumers are on a spending frenzy with the savings rate hitting its lowest level since Hurricane Katrina in August of 2005. The core inflation rate is also growing by 2.2 percent year-over-year, which is well above the Fed’s target rate of 1 to 2 percent.
Meanwhile the US stock market has shown signs of recovery as the DJIA hit new highs for the week with the S&P 500 showing advances as well. Out of the 30 Dow’s components, 29 of them traded higher, giving greater support to blue chip firms. Oracle Corp. and Research In Motion Inc. also reported higher than expected quarterly earnings which led advances in tech stocks. Merrill Lynch & Co., Inc helped to restore confidence in financial stocks as they announced the possibility of a capital infusion from Temasek Holdings in Singapore.
US treasuries have faltered as the equities markets made advances, with the Federal Reserve conducting biweekly auctions of short-term funds as a measure to suppress the repercussions from the credit crisis. The Fed sold off $20B of 35 day credits at a rate between 4.65% and 4.67%, saying that they will continue to hold these auctions “as long as necessary.” The ECB, BOE, and the SNB stated that they will join in the efforts of improving and restoring confidence in the credit market, and announced that they will collaborate with one another in holding special auctions of treasuries as well. Bond yields are up across the board with the 10 year Treasury rate rising to 4.168 percent.