Today’s session was a relatively quiet one for the dollar in terms of fundamental impact and volatility. Yet, despite the relative calm, the currency still managed to count its tenth consecutive bearish close (on a trade-weighted basis) and extend itself to a new low for the year. The selling trend behind the world’s reserve is deeply engrained; and it will take either a momentous event or a massive turn in investor sentiment (that is manifest in equities, fixed income and all speculative asset classes) to turn us off course. This is not to mean that we won’t see temporary corrections in the near-term. Indeed, such prolific trends do not exist without pauses along the way. However, to truly turn the dollar’s fortunes around, something elemental has to change.
While the dollar is stuck in a sentiment-dug rut, we shouldn’t ignore the data that feeds into forecasts for growth and the eventual return of a hawkish monetary policy stance. Amongst the listing for the day, the housing data was the most attention grabbing. Construction on new homes grew three percent last month to a 598,000 unit a year pace – the fastest in nine months. Modestly better than expected, the breakdown showed reason for concern as single family homes actually contracted for the first time since January. Housing is a sensitive barometer for economic health due to its ties to credit activity and consumer spending; and new construction is further the leading measure for the sector. The other releases for the day hold less sway. Initial jobless claims for the week ending September 12th unexpectedly contracted – in line with the steady improvement in the pace of monthly payroll cuts. The Philadelphia Fed manufacturing report surged to its highest positive reading since June of 2007; but the regional report doesn’t necessarily set a precedence for the broader economy.
In the end, it was the unscheduled releases that were far more interesting for the dollar considering the influence that risk trends, capital flow and exit strategies have in today’s markets. The Federal Reserve’s Flow of Funds report recorded a $2 trillion increase in US household wealth through the second quarter for the biggest increase on records going back to 1952. This is a boost supported by both the early reversal in housing ($139 billion) and the rebound in capital markets ($1.36 trillion). At the same time, we are still a way from returning to the levels of wealth and availability of credit that we were used to before the financial crisis. Another story that seems to have generally gone under the radar is the Fed’s review of major financial institutions’ exposure to commercial real estate. While this doesn’t seem to be anything as formal as the ‘stress test’ earlier this year; it highlights the most unstable area of financial moving forward. Looking ahead to tomorrow, there are no meaningful indicators scheduled for release; so the path of least resistance is for chop that likely breaks the steady trend. Though, it should be noted that major reversals in underlying sentiment have often developed when the docket was empty and the weekend was in sight.