The US dollar slid across all of its major counterparts as the Fed cut another 25bp and gave a murky outlook for future policy shifts. As a result, the greenback took the biggest loss against the yield hungry commodity currencies. At the same time, the single currency failed to hold up against the opposite end of the yield spectrum as the Swiss franc and Yen pairs fell back to 1.035 and 103.9 through the US session, respectively. Against the European currencies, the US dollar consolidated the week’s gains. Against the euro, the greenback was trading in the 1.562 range, while the British Pound continued to chip away at the dollar with a jump to 1.988.
On the economic front, first quarter GDP figures turned out better than expected as the economy grew at an annualized rate of 0.6 percent – though much of the rise was merely reflected through an increase in inventories. More pertinent to growth trends gong forward, consumer spending slowed to 1.0 percent from 2.3 percent, and marked the slowest rate of consumption in seven years. Equally unsettling was the drop in business spending – the first in a year and only the second contraction in the past four years. The key component of the drop was unsurprisingly residential investment; but the lack of export strength considering the weak dollar more than made up for that. With the threat of growth cooling further, the FOMC in turn trimmed the nation’s benchmark interest rate by 25bp to 2.00 percent and stated that the “financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.” Despite these cautious projections for the economic activity however, the market took the quarter point cut in stride with confidence that the Fed would now turn to a neutral policy stance to monitor inflation and financial market conditions.
Bearish sentiment dragged the stock markets as they peaked prior to the Fed rate cut, but retraced all of their gains as economic concerns pressed on investors. As a result the DJIA shaved 11.81 points to hold at 12,820.13 after rising to an intraday high of 13,010, with tech giants IBM and HP topping the losers. The broader S&P500 fell 5.35 points to 1,385.59, with 130 stocks falling to a new 52 week low.
US Treasuries advanced as the securities market lost ground, with investors moving into the safe haven of risk free bonds as growth prospects remain uncertain. As a result, the benchmark 10-Year yield fell to 3.738 percent from 3.823, while the 2-Year yield plunged to 2.278 percent from 2.362 percent.
Looking ahead, the Challenger Job Cuts index will kick off the morning at 11:30 GMT, and will be followed by the Personal Income and Spending indices at 12:30 GMT. These numbers aside, top event risk is undoubtedly the ISM Manufacturing index due at 14:00 GMT. This has historically been one of the top market moving indicators for the US dollar, but even with a forecasted third print below 50, reaction to the data will likely remain muted with Friday’s NFP release holding traders’ attention.