US Dollar Likely to Continue Declines Through Short Term

The US dollar continued on its losing ways, matching fresh record lows against the Euro and plumbing new depths against its Canadian counterpart. Fresh consumer price inflation data only worsened outlook for the downtrodden greenback, with a softer-than-expected CPI figure boosting the likelihood of further Federal Reserve interest rate cuts through year-end. Yet the swift dollar sell-off moderated in later trade, with the US$ showing signs of life through the New York afternoon session.

The euro matched yesterday’s record highs of $1.3988 following the US CPI data, but near-instant reversal left the dollar bid in the moments that followed. The British Pound suffered a similar fate near the New York session open, but a later retracement left the sterling an impressive 80 points off of intraday lows at $2.0021. A strong performance in global equity markets left the Japanese Yen lower for the second consecutive trading day, with the dollar improving ¥0.28 improved to ¥116.10 in US trade.
Global financial markets turned a blind eye to the morning’s Consumer Price Index data, as the soft result was largely overshadowed by yesterday’s Federal Reserve interest rate decision. The Core CPI rate fell below analysts’ consensus forecasts at 2.1 percent on a year-over-year basis?just barely above the Fed’s de facto target of 2.0. Such a figure leaves scope for continued monetary policy accommodation through year-end. Indeed, Fed Funds futures boosted expectations for a further 50 basis points in rate cuts through final three months of 2007. Worsening yield differentials for the US dollar can only sink it to further lows against major counterparts, with the NYBOT-traded Dollar Index at a 15-year trough.

Simultaneous housing data gave further confirmation of the ongoing recession in the domestic real estate market, with Housing Starts at their lowest levels since June of 1995. The result came of little shock to financial markets, as traders have largely discounted a very bearish outlook on housing activity for the world’s largest economy. Yet a simultaneous 5.9 percent tumble in Building Permits further doomed new constructions to further lows?exacerbating pessimistic sentiment on the housing and lending sectors.
US equity markets ignored the dismal housing figures to post their second consecutive day of gains, with the Dow Jones Industrial Average 87 points improved to 13,826. The S&P 500 was the largest percentage gainer on the session, adding 0.7 percent to 1,530. Yet the tech-heavy NASDAQ Composite continued to underperform its major counterparts, inching 0.5 percent higher to 2,665.

An ease in market tension sent Treasury Yields higher yet again, with the 2-year note at 3.98 percent through the day’s close. The 10-Year Treasury Note likewise saw itself lower on the session, with yields climbing 5 basis points to 4.52 percent.

Written by David Rodriguez, Currency Analyst for