US Dollar Plummets and Euro Sets Record Highs, No End in Sight?

The US dollar hit multi-decade lows on a trade-weighted basis, with the Euro at all-time highs and the Canadian dollar strongly past parity against its US namesake. Traders asked themselves whether we will see an end to protracted greenback weakness, but early signs suggest that the dollar may fall further before setting any meaningful lows. Continued disappointments in economic data and overwhelming dollar-bearishness have thus far prevented a worthwhile rebound.

Continued calls for a top on the Euro have fallen on deaf ears, with the single currency setting fresh record-highs of $1.4247 through the New York afternoon session. Persistent dollar selling pushed the trade-weighted Dollar Index to its lowest in 15 years, with the British Pound likewise rallying an impressive 160 points to $2.0435. The downtrodden Japanese Yen remained sold against most foreign counterparts, but the dollar nonetheless shed ¥0.85 to ¥114.76.
Morning US economic data only intensified dollar selling pressure, with University of Michigan Consumer Confidence figures and Personal Income results failing to inspire confidence in the greenback. A positive surprise in Personal Spending was largely offset a slightly weaker-than-forecast Income measure. Consumption grew by 0.6 percent through August, matching its fastest rate of growth since April. Yet Income growth decelerated to 0.3 percent through the same period?pushing the Savings rate to a paltry 0.7 percent. Given overall fears of growing consumer debt, such a result will hardly improve sentiment on the future of lending market performance. Yet one month is hardly the signal of a new trend. July’s 0.9 percent savings rate had matched February’s highs of 0.9 percent.

Simultaneous Personal Consumption Expenditure Deflator numbers came in line with consensus forecasts, with the headline at a relatively modest 1.7 percent on a year-over-year basis. The closely-scrutinized Core measure remained unchanged at a 1.8 percent yearly basis?below the Fed’s de fact 2.0 percent target. Muted price pressures can only add to speculation that the central bank will cut rates further by year end, keeping the dollar sold through the medium term.
Later-morning University of Michigan Consumer Confidence figures fell below consensus forecasts, confirming weakness in recent sentiment trends. The headline number printed at its worst since August of 2006 on fears of a continued housing recession?its first year-over-year drop in five months. The forward-looking expectations index was modestly improved to 74.1, likely reflecting anticipation for further Federal Reserve interest rate cuts and lower borrowing costs through the medium term.

Domestic equity markets were largely mixed through the afternoon, as hopes for further Fed rate cuts were unable to boost corporate shares. The Dow Jones Industrial Average fluctuated between positive and negative territory through the afternoon, falling a modest 0.1 percent to 13,895 at time of writing. The other two major indices were not quite as fortunate, however, with the S&P 500 and NASDAQ Composite both falling 0.3 percent to 1,526 and 2,702, respectively.
US Treasury yields were similarly mixed on the session, but a late sell-off in fixed income markets pushed prices lower through the afternoon. The highly interest rate-sensitive 2-Year Note added 3 basis points in yield to 3.97 percent, while the 10-Year inched 4 basis points higher to 4.60 percent. Clear expectations of further Federal Reserve interest rate cuts is keeping the short-end of the curve bid, with Fed Funds Futures now pricing in an 84 percent probability of a further 25 basis point rate cut in October.

Written by David Rodriguez, Currency Analyst for