US Dollar Shrugs Off Stronger Data, Volatility Continues to Remain Low

With so much economic data released out of the US today, the hope was high for some meaningful activity in the US dollar. Unfortunately that did not happen despite solid retail sales, import prices and business inventories. Why?

Because the voracious appetite of US consumers and the higher inflationary pressures do nothing more than validate the Federal Reserve?s plans to keep interest rates unchanged. The interest rate curve is now pricing in a greater chance of a rate hike over a rate cut, but with growth only beginning to improve, it is far too early for the central bank to actually consider lifting rates especially since high bond yields are still a problem that the economy faces. RealtyTrac Inc recently announced that foreclosures increased 90 percent in the month of May which indicates that even though the stock market is continuing to rise there is a part of the country that faces very serious economic problems. Yet this should not undermine the fact that consumer spending was very hot in the month of May. Not only did headline retail sales double expectations and sales excluding autos increase by 1.3 percent, but stripping out the record gasoline prices, we still saw a 1.2 percent rise in spending. The strength of the labor market is clearly is helping to fuel spending because as long as people have jobs, paying their rent or mortgages will be their number one priority. Meanwhile both the Treasury Report on Currency Manipulation and the Beige Book triggered lame reactions in the currency market. There were no major surprises in the Beige Book and as we expected, the recent policy changes by China saved them from being branded a currency manipulator. The US dollar is mixed today with moderate strength seen against the Euro and Japanese Yen, but weakness against the British pound and Canadian dollar. Inflation reports continue with producer prices up for release tomorrow. The weak dollar helped to boost import prices; we expect the same impact on producer prices as well.