The US dollar was the weakest of the majors after a brief morning rally as US equities recovered from their session lows. Looking to the news on hand, the third and final reading of US Q2 GDP was changed to -0.7 percent from previous estimates of -1.0 percent as personal consumption, business investment, and government spending were all revised higher. The shift has added to speculation that the US emerged from recession in Q3, though it may be due almost entirely to the “cash for clunkers” program, which ended on August 24. Meanwhile, the International Monetary Fund (IMF) said in its Global Financial Stability Report that banks around the world may still need to reveal about half of their losses stemming from the financial and economic crisis, saying that credit risks remain “elevated” even though financial conditions have improved significantly since spring. While the IMF revised their forecasts for total losses in the financial system to $3,400 billion between 2007 and 2010, from the $4,000 billion estimate it announced in April, they also noted that lingering credit risks and weakened banks may keep a lid on new credit and global growth.
On Thursday, the 8:30 ET release of US personal spending is projected to show a whopping 1.1 percent rise for the month of August, which would be the highest reading in nearly 6 years. That said, the increase is likely to be due primarily to sales of durable goods like automobiles as the “cash for clunkers” drove demand for the products higher. At the same time, though, we already know that durable goods orders for the month of August slumped 2.4 percent, which may signal some risks for a disappointing personal spending result. Likewise, personal income is anticipated to rise a slight 0.1 percent, which won’t do much to lift the year-over-year rate of -2.4 percent, nor will it indicate any sort of impetus for consumption to stage a strong recovery. That said, Federal Reserve Chairman Ben Bernanke will begin testimony at the House Financial Services Committee hearing at the same time, which will be part of a series of sessions on financial regulation. If Bernanke suggest that significant risks remain throughout the markets because additional regulation has not been pushed through, his comments may override any of the sentiment reflected in the personal spending and personal income reports and subsequently weigh on FX carry trades.
Later in the morning at 10:00 ET, the ISM manufacturing index is projected to rise for the ninth straight month in September to 54 from 52.9, which would be the highest reading since April 2006. With 50 being the point of neutrality, this would also be the second month that the index signals an expansion in activity, adding to evidence that the sector is experiencing a recovery in business activity. The last release didn’t have much of an impact on the US dollar, as risk aversion dominated the day, leading the currency higher. However, the report will still be useful because of its employment component as a leading indicator for Friday’s US non-farm payrolls report.