US Dollar Finally Catches a Break, but Will Rallies Persist?

The US dollar finally caught a break, as a sharp rally in Treasury bond yields allowed the downtrodden greenback to bounce off of multi-decade lows. Marginally bullish Initial Jobless Claims data helped the dollar retrace lost ground, but markets showed little conviction in the US$ bounce?leaving scope for continued selling.

The euro reached fresh record highs of $1.3926 before easing to intraday lows of $1.3862 on the New York trading session. At the same time, increased demand for high yields sent the Japanese Yen significantly lower through the afternoon; the US dollar rallied an impressive ¥1.04 to ¥115.29. A broader carry trade bounce was likewise enough to boost support for the recently weak British Pound, which added $0.0031 to $2.0320 at time of writing.
Fresh economic data included the morning?s US Initial Jobless Claims report, which registered a lower than expected gain in new unemployment insurance applications. The better-than-forecast result showed hope that recent anecdotes of extensive layoffs across the job market may prove exaggerated. Indeed, the Initial Jobless Claims figure remained almost exactly flat as compared to the prior week of results. Much as we have argued recently, the Fed will likely pay close attention to such timely reports on the overall health of the economy. The earliest job market figures suggest that labor growth has slowed, but Fed officials have been quick to note that this shall be examined in conjunction with future consumption and inflation trends.

The dollar advance subsequently showed signs of slowing near the New York close, as traders remain hesitant to force major currency movements ahead of key economic event risk. Tomorrow?s US Advance Retail Sales figures will be the clear highlight of the week, as expectations for the future of domestic interest rates will depend on the strength in retail consumption. Given current market forecasts for a mere 0.3 percent chance of unchanged interest rates through the Fed?s September 18th meeting, speculators are clearly gearing up for bearish US economic data. Yet any strong surprises to the topside could easily dent such sentiment and cause similar moves in the US dollar.
Domestic equity markets rallied strongly off of yesterday?s close, with the Dow Jones Industrial Average up 136 points to 13,427. Investors seemed willing to take on more risk on signs that the recent global credit crunch was easing. The S&P 500 was similarly improved at 0.9 percent to 1,485. Yet mixed results among technology stocks left the NASDAQ Composite a more modest 0.5 percent higher at 2605.

Government Treasury bond markets saw their worst performance in many days, with bond yields sharply higher across the board. The highly interest rate-sensitive 2-Year Note added 9 basis points to yield 4.05 percent, while the 10-Year bond gained 7bp to 4.48 percent.

Written by David Rodriguez, Currency Analyst for DailyFX.com
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