US Dollar Reaches Fresh Record Lows Against Euro on Subprime Fears

The US Dollar receded to fresh multi-decade lows against the euro, as renewed worries over the domestic subprime lending sector dogged the greenback through New York trade. Economic data included the usually market-moving Consumer Price Index report, but an almost exactly at-consensus result failed to cause any major volatility across dollar pairs. Instead, a speech by Fed Chairman Ben Bernanke heightened fears of a housing-led slowdown and pulled the dollar lower for the second consecutive day.

The Euro reached new heights on the day before settling to $1.3805 through the midway point of the New York trading session. Traders likewise sent the British Pound to 26-year peaks on the day, with Cable changing hands at $2.0537 at time of writing. An overall flight to safety sent the Japanese Yen higher across the board, with the US dollar losing ¥0.26 to ¥121.79.
Morning economic data proved largely uneventful, as the US Consumer Price Index came in exactly at consensus estimates of 2.2 percent year-over-year Core growth. Headline inflation was slightly above forecasts at 2.7 versus 2.6 percent expected, but markets showed little concern that this would affect the US Federal Reserve?s thinking on overall price pressures. Simultaneous Housing Starts figures grabbed far more attention, as the number of permits to build new homes fell to their lowest levels since 1997. The result was perhaps not entirely shocking; yesterday?s National Association of Home Builders data showed that confidence in the sector fell to fresh 16-year lows in the month of July. Such news only adds to the pessimistic outlook on the overall real estate market, with later US Fed Chairman Ben Bernanke testimony doing little to boost spirits on the future of consumer spending growth.
The Fed Chairman strayed little from previous communications on monetary policy, highlighting inflation as the primary risk to the economy through the medium term. Yet the central banker was much more explicit in his pessimistic outlook for the domestic housing sector and recent subprime lending issues. He noted, “risk to the outlook [on growth] is that the ongoing housing correction might prove larger than anticipated, with possible spillovers into consumer spending.” He went on to speak at length on the impact of the subprime lending market troubles on the domestic consumer, but fell short of incorporating such lending woes into outlook for broader domestic growth. The focus on the lending sector nonetheless spooked many currency traders, who began selling dollars on such overt references to a potentially troublesome sector of the economy.
Domestic equity markets likewise took their cue from the Fed Chairman?s speech, with stocks trading lower on fears of further housing market correction hurting consumer spending. The Dow Jones Industrial Average was well off yesterday?s all-time highs, trading 109 points lower to 13,862 through time of writing. The NASDAQ Composite was hit especially hard, as the index lost a full percent to 2,685. Meanwhile, the more diversified S&P 500 Index shed 11 points to 1539.

US Treasuries unsurprisingly gained ground on the renewed risk aversion, with the benchmark 10-year Note 11/32 points firmer to 96 and 1/8. Yields lost 5 basis points to rest at the psychologically significant 5.00 percent marker.