The US dollar rallied to fresh two-week highs against the euro and other major currencies, as reported fiscal year-end squaring led major corporations to cut overextended dollar-short positions. Unexpected intraday volatility pushed the greenback sharply off of recent lows, with the trade-weighted US dollar index hitting its highest levels since November 20. Disappointing US Personal Income and Spending reports were not enough to deter the surprising dollar rally, and indeed it seems as though markets largely ignored the fresh fundamental developments.
Traders sent the dollar sharply higher within the last hour of London session trading, closing USD positions with little apparent regard to price. The panicked dollar buying subsequently sent key currency pairs through standing buy orders which only exacerbated the swiftness of the move. Yet it seems as though the dollar ran out of steam following the 11:00 EST London session close. Such price action suggests that renewed euro and British Pound selling pressures are merely a function of month-end and year-end position squaring—hardly an endorsement for further greenback gains. Indeed, the day’s economic developments only further dimmed outlook for the future of dollar performance.
US Personal Income and Spending grew less than forecast through the month of October, with the monthly income growing at its slowest pace since an unexpected drop in April. A drop in Disposable Income left inflation-adjusted spending exactly flat through the period, and it seems as though mounting inflationary pressures may cut further into real spending growth. Indeed, a simultaneous Personal Consumption Expenditures (PCE) Deflator registered its largest year-over-year change since August, 2006 at 2.9 percent. Higher inflation levels cut into hopes that the US Federal Reserve would lower interest rates at its upcoming meeting, but markets nonetheless remain convinced that the Federal Open Market Committee will vote to reduce overnight rates by 25 basis points to 4.25 percent.
Those same rate forecasts have clearly benefitted domestic equity indices, however, with the Dow Jones Industrial Average up a further 42 points to 13,357 through afternoon price action. If the key index closes near current market prices, it will have posted its best weekly performance in eight months. The highly diversified S&P 500 index has rallied a similar 0.7 percent to 1,479 on the day. Yet the tech-heavy NASDAQ Composite actually remains slightly lower at -0.2 percent to 2,664.
[I]Written by David Rodríguez, Currency Analyst for DailyFX.com[/I]