US Dollar Drops on Dow Rallies - Forex Traders Remain Indecisive

The US dollar fell strongly against the euro and the Canadian dollar, retracing much of yesterday’s gains and dashing hopes of a continued short-term rally. The reversal came on purely speculative flows, and there were few concrete reasons for the sharp turn in intraday trends. A relatively empty economic calendar left currency traders to react to movements in other financial markets, with currencies proving particularly sensitive to movements in the Dow Jones Industrial Average and other key stock indices.

The euro rallied to intraday highs of $1.4287 through time of writing—a full 60 points off of Sunday’s all-time peaks. Dollar weakness extended to other major currency pairs, and the British Pound added an impressive 200+ points to $2.0509. A bounce in global equity markets made the Japanese Yen one of the few currencies to lose against the greenback, with the dollar adding 0.10 Yen to 114.66.
Morning economic data only added to dollar selling pressures, as the Richmond Fed Manufacturing survey unexpectedly fell to 5-month lows. Declining shipments and new orders were mostly to blame for the disappointment, while a drop in inventories painted a similarly dreary picture for outlook on the broader sector. Yet the exact opposite change was seen in the more significant Richmond Fed Services result. The less-publicized non-manufacturing figure jumped 13 points to a reading of 4—a significant improvement after two months in negative territory. Given that the Services sector accounts for a larger portion of the overall economy, positive results in such data may improve Fed sentiment on growth prospects. A broader downtrend in economic activity precludes renewed optimism on the monthly improvement, but any signs that we will continue to see a recovery in service industries would undoubtedly boost sentiment for the US economy.
The Dow Jones Industrial Average rallied for the second consecutive trading day, adding 78 points to 13,645 through time of writing. Such a bounce undoubtedly improved sentiment across risky asset classes and explains Japanese Yen declines. Tech stocks led rallies in the US stock market, with the NASDAQ composite gaining an impressive 1.0 percent to 2,782. At the same time, the diversified S&P 500 added 0.5 percent to 1,514.
A bounce in global stock markets eased buying pressures on the US Treasury Bond market, but short-term yields nonetheless fell with the 2-Year losing 3bp to 3.83 percent. Yet interest rate expectations remained largely unchanged on the day, with Fed Funds Futures contracts remaining relatively unchanged through the period.
Written by David Rodríguez, Currency Analyst for DailyFX.com