The US dollar struggled to rally despite stronger economic data today. Risk aversion is back in play with the Dow dropping by the biggest amount in over a week.
The ultimate fear in the financial markets is that this will not just be a one day decline and instead will mark the end of the rally in US stocks. Although we have said often that the rally in the Dow is ripe for a turn, nothing has changed in the past 24 hours. Even though the Chinese stock market fell as much as 7.2 percent last night, it rebounded and ended the day up 2.6 percent. Bernanke commented on the US economy today, but his message has not changed. He expects the housing market to remain a drag on the US economy, but he still expects growth to pick up in the second half of the year and continued to warn that inflation remains a risk. This is the central bank governor?s way of saying, interest rates will remain unchanged for the remainder of the year. Meanwhile service sector ISM hit a one year high in the month of May, confirming that the weakness of the US dollar has not just benefited the manufacturing sector. The underlying components of the ISM report were also strong with advances seen in prices paid, employment and new orders. The one thing that has been weighing on the dollar is reserve diversification. It is confirmed that Syria will be dropping their dollar peg. They are the second country to do so in the past 2 weeks. On May 20th, Kuwait switched to a basket of currencies. Both countries have blamed the weak dollar for boosting import costs and inflation. There is no significant US data on the calendar until Friday, but the movements in the Dow and the rate decisions in Australia, New Zealand, UK and Eurozone will still bring us market volatility.