The US Dollar pulled back across the majors this morning as the overbought currency finally shows signs of correction.
The release of the Conference Board’s US leading indicator triggered the move as the index of 0.7 percent in July, which mark the worst drop since the credit crunch began at the end of last summer. Looking at a breakdown of the index, rising jobless claims and deteriorating building permits and stock prices all took a toll. However, the declines are not entirely surprising given the broad losses in the labor markets, housing sector, and equity markets. Meanwhile, Credit Suisse overnight index swaps are showing diminishing rate hike expectations for the Federal Reserve over the next 12 months, as they now price in 56bps of increases compared to over 75bps just a week ago. Furthermore, [B]the latest forex positioning numbers show that the US dollar is likely to weaken before continuing its rally[/B].
Additional event risk looms on Friday at 10:00 EDT, when Federal Reserve Chairman Ben Bernanke will speak on financial stability at the Kansas City Fed’s annual symposium in Jackson Hole, WY. His commentary tends to ignite major volatility for not only the greenback, but also for US Treasury and equity markets (and thus, the Japanese Yen crosses). Given the uncertainty surrounding the health of US financial institutions, commentary on the financial markets will be watched closely and bearish sentiment by Mr. Bernanke could weigh heavily on risk-appetite. On the other hand, if Mr. Bernanke signals optimism that the US economy and financial sector can weather the storm, the US Dollar and risky assets, in general, could gain.