US Dollar Falls on Signs of Stabilization in Global Carry Trade

The US Dollar lost ground in early-week trade, with a modest return to risk appetite leading it lower against the Euro and other major counterparts. The US Dow Jones Industrials Average shrugged off earlier declines to trade almost 90 points improved through time of writing, while short-term Treasury yields were similarly upbeat at +7 basis points to 4.56 percent. Markets will have to post significantly more gains to retrace previous tumbles, but early signs of stabilization bode well for the future of the popular foreign currency carry trade.

The US dollar slid 40 points against the Euro to trade at $1.3677 midway through the New York trading session. British Pound bulls nonetheless saw their currency continue to lose on carry trade shake-outs, with Cable changing hands at $2.0234 through time of writing. The Japanese Yen saw a soft bid for much the same reason, taking 20 points from the greenback at ¥118.56.

There was no new economic data on the day, but markets look forward to the coming week of significant event risk. Tomorrow will bring important Personal Income and Spending data as well the closely followed PCE Deflator number and Chicago Purchasing Managers Index Survey. Consensus forecasts show that analysts predict that income rose 0.5 percent in June, but a slump in spending will leave consumption almost nearly flat at 0.1 percent through the same period. The simultaneous PCE Deflator report will likely show that inflation pressures remain elevated at a 1.9 percent core rate on a year-over-year basis. Disappointments in the prices data will surely place further selling pressure on the US dollar, which has arguably been buoyed by expectations of stable interest rates through year-end 2007. Lower-than-forecast inflation figures will only boost speculation that the Federal Reserve will cut interest rates through coming months, sending the US dollar lower against currencies that will see higher rates in 2007.
Equity markets continue to dominate headlines, with volatile trade on the overnight session resulting in respectable gains through the afternoon. The Dow Jones Industrial Average gained 87 points to 13,352 at 18:00 GMT. The recently downtrodden S&P 500 saw a larger percentage move at +12.34 to 1,471.29, while the tech-heavy NASDAQ Composite added 18 points to 2,580.25. Stocks advanced as bargain-hunters re-entered positions on what were perceived to be inexpensive entry points for US shares. High-profile analyst upgrades on construction and homebuilder names likewise renewed optimism in the maligned housing and commercial building sectors. A continued rebound in such shares would bode well for broader market performance, as the laggards have clearly put a dent into index valuations.
Fixed income markets traded sharply lower on the day, with the short end of the US Treasury curve moving 1/8 points lower to 100 and 1/8. The 2-year Note added an impressive 7 basis points in yield to 4.56 percent, while the 10-year issue also added 3 bp to return 4.96 percent. Continued selling pressure on treasury bonds can only boost the dollar?s cause, as global investors continue to seek the highest yields across worldwide asset classes.