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U.S. Dollar Falls After Poor GDP

The U.S. dollar traded in a mixed direction overnight before the release of this morning’s data, but continue to trade near the highs of recent ranges.  Indeed, the dollar rallied to a monthly high against the Japanese yen.  However, the final 3^rd Quarter GDP number showed that the U.S. economy expanded at a slower pace than anticipated with a reading of 2.2% growth, versus an expectation of 2.8%.  Personal consumption also registered slightly worse than expected at 2.8% versus an estimated 2.9%.  The greenback has lost ground in early trading as the data indicates the U.S. economy maybe take longer to pull out of the recession that some had previous thought, lowering future interest rate outlooks.  Later this morning sees the release of existing home sales, which are projected to rise 2.5% in November after jumping 10.1% in the previous month. 

 

The Euro halted its recent decline against the dollar, but remains near recent lows as traders remain skeptical of a quick global recovery.  The European economic docket showed consumer confidence in Germany unexpectedly weakened, with the GfK survey pulling back to 3.3 from a revised reading of 3.6 in the previous month.  Some investors expect conditions to get worse over the coming months as policy makers continue to see a risk for a protracted recovery in the euro-region.  However, as U.S. equity markets are poised to open higher, combined with poor U.S. GDP data, the common currency could find some support. 

 

The Japanese yen weakened against its major counterparts as global stocks ticked higher.  Indeed, the yen fell to its monthly low against the greenback.  Bank of Japan Governor Masaaki Shirakawa said yesterday that the central bank will “persistently” keep interest rates at “virtually zero” to fight deflation.  In addition, the central bank unveiled a 10 trillion yen lending program at the beginning of the month, weighing on the currency. 

 

The British pound fell for the second day against the dollar, but has found some early morning support following data that shows a weakened outlook for growth in the U.S.  Meanwhile, the final 3^rd quarter GDP reading for the U.K. showed the economy contracted 0.2% from the second quarter amid an initial forecast for a 0.3% drop in the growth rate, while the annualized rate slipped 5.1% from the previous year after tumbling 5.8% during the three-months through June. The breakdown of the report showed household consumption increased 0.1%, with business investments surging 2.2% during the three-months through September.  Despite the strong data, thin market conditions are likely to produce choppy price action throughout the rest of the week as investors go off-line ahead of the Christmas Holiday.
 

US$ Trades in Flat Ranges Overnight

The U.S. dollar traded in sideways ranges overnight, gaining modestly against the British pound and Japanese yen, while weakening slightly against the Euro.  With no major economic data scheduled for release this morning, the rate of exchange will likely take its cue from U.S. equity markets, which are pointed towards a higher open.  Tomorrow morning sees the release of final 3^rd Quarter GDP numbers and Personal consumption, followed by Existing Home Sales and ABC consumer confidence on Wednesday.  Personal Income and Personal Spending are slated for Thursday, while Durable Goods orders and Jobless claims will round out the week on Friday.  Lack of liquidity in the markets this week could cause the data to move the dollar in exaggerated swings.  Overall, expect the dollar to continue to trade with the prevailing risk sentiment.

 

The Euro has remained relatively unchanged, as an empty economic calendar has failed to inspire markets.  A developing news story is Dubai world meeting with its lenders in an effort to negotiate a standstill on their debt payments. However, the complexity of the debt structure is making it difficult for the state owned holding company to generate the desired results. If the potential for default re-emerges then we could see a sharp decline in risk appetite this week, weakening the high yielding currency.  However, with U.S. stocks set to open positive, the common currency would continue to gain slightly.

 

The Japanese yen was largely unchanged overnight as investors continue to jockey between risk aversion and risk assumption.  Today we saw the Bank of Japan release their monthly report in which they still point toward a continued recovery, but showed a slightly more cautious outlook for exports and production. "The uptrend in exports and production is expected to continue, reflecting continued improvement in overseas economic conditions, although the pace of increase is likely to moderate gradually," the BOJ said in notes released from the bank's policy meeting. This will continue to put pressure on the yen, which has traded lower since the central bank announced its 10 trillion yen lending program earlier in the month.

The British pound has also seen a quiet start to the week with an empty calendar, but data later on in the week could spark volatility. Tomorrow’s final reading for 3^rd Quarter GDP is forecasted to show an upward revision to -0.1% from -0.3% as the U.K. economy, as many expect that that the economy will return to growth in the fourth quarter. The prospect of future growth could generate support for the sterling especially if we see an increasing hawkish tone from the BoE minutes due for release on Wednesday. The central bank paused their asset purchase program at their December meeting, and if the language points toward an end to quantitative easing then we could see a rise in the interest rate outlook adding to the bullish case. However, if any MPC members voted for additional measures then the current bearish trend may continue, weighing on the sterling.

 

US$ Mostly Unchanged, Stronger Against the Yen

The U.S. dollar consolidated overnight, falling slightly against most major currencies as European stocks and U.S. equity futures retraced some of yesterday’s losses.  However, the dollar was able to rally against the Japanese yen on speculation that the central bank will continue to keep their interest rates at almost zero for the foreseeable future.  There is no major economic data scheduled for release in the U.S., so exchange rates will likely take their cue from equity markets.  If U.S. stocks regain their footing, the dollar would face increased pressure before the weekend.

 

The Euro ended its three-day decline against the greenback as strong economic data and higher equities buoyed the riskier Euro.  Business confidence in Germany rose to a 17-month high in December as the index topped forecasts and climbed to 94.7 from 93.9 in the previous month.  Moreover, producer prices in the region grew 0.1% in November after holding flat during the previous month as fuel and mining costs increased 1.2%.  The annualized rate of PPI slipped 5.9% from the previous year after tumbling 7.6% in October. The Euro will continue to trade tandem with risk, rising and falling with global stocks. 

 

The Japanese yen fell against the Euro and Dollar after the Bank of Japan said it would not tolerate consumer prices declines, spurring speculation the central bank will keep the target lending rate at almost zero.  As widely expected, the Bank of Japan kept is lending rate at 0.1 percent at yesterday’s policy meeting in Japan.  BoJ Govenor Shirakawa did not announce any further policy actions, choosing instead to watch the effect of a 10 trillion yen lending program adopted two weeks ago after the government urged them to do more to fight deflation.

 

The British pound gained modestly against the dollar after a slight rebound in risk appetite.  Meanwhile, the Bank of England Financial Stability report said the U.K. financial system has become “significantly more stable” as a result of the unprecedented steps taken on by the government, but went onto say that the “probability of default by U.K. real estate companies has increased significantly” as households continue to face a weakening labor market paired with tightening credit conditions. However, consumer confidence in the U.K. weakened in December, with the GfK survey falling back to -19 from -17 in the previous month, while business investments slipped 0.6% in the third quarter amid an initial forecast for a 3.0% decline.

US$ Rallies Across the Board As Equities Fall

The U.S. dollar rallied across the board overnight as the greenback continues to benefit from safe-haven flows.  Indeed, the dollar is now trading at the best level against the Euro in over three months and the highest level against the pound in two months.  Global stocks and commodities fell as Greece’s downgrade fanned concern that spiraling national debt may hamper the global recovery.  Initial and continuing jobless claims both registered slightly weaker than expected, a reminder that the labor market will take time to strengthen and may weigh on economic recovery.  Later this morning, the leading indicator for the world’s largest economy is forecasted to rise 0.7% in November after rising 0.3% in the previous month, while the Philadelphia Fed’s manufacturing index is expected to weaken to 16.0 in December from 16.7 in the month prior as businesses keep a lid on production. The U.S. dollar may continue to strengthen throughout our trading session as U.S. equities are set to open lower.  

 

The Euro continued to retrace this summer’s advance, falling to the lowest level against the dollar in over three months.  As global equities retreat, the common currency may continue to weaken.  Meanwhile, the economic docket showed construction outputs in Euro-Zone weakened for the sixth consecutive month in October, with the index slipping 0.6% after falling a revised 0.8% in the previous month.  The data reinforces a weakened outlook for future growth as policy makers anticipate a gradual recovery in 2010, and the ECB is likely to hold a dovish bias for future policy going into the following year, as price pressures remain subdued.

The Japanese yen gained against all of its major counterparts, while falling slightly against the dollar, as a fall in global risk appetite caused investors to seek the safety of the dollar and yen. The safe-haven currency will likely continue to gain during our trading session and U.S. stock futures foreshadow a lower open.

 

The British pound plunged to its lowest level in two months against the dollar after data showed U.K. retail sales unexpectedly fell in November.  Indeed, retail spending held at 13 for the second consecutive month in December amid an initial forecast for a rise to 19.  Also, household spending in the U.K. slipped 0.3% in November amid expectations for a 0.5% rise, while the annualized rate increased 3.1% from the previous year.  The data suggests that households remain reluctant to spend as policy makers continue to see a risk for a protracted recovery. 

U.S. Dollar Declines Slightly Ahead of Fed Decision

The U.S. dollar weakened slightly overnight as European stocks rose and U.S. equity futures show North American stocks will retrace yesterday’s modest decline.  The U.S. dollar did gain against the Aussie dollar as central bank Deputy Governor Ric Battellino damped expectation for further interest rate increases in Australia.  This morning saw the release of consumer prices in the U.S. showing a rise to 0.4% in November after growing 0.3% in the previous month, while the headline reading for inflation increased to 1.8% from the previous year after contracting 0.2% in October. The data reinforces yesterday’s PPI reading that showed increased inflation pressures in the U.S. economy.  Housing starts were also released inline with expectations.  The dollar will likely trade in choppy ranges ahead of this afternoon’s Fed rate decision.  The Fed is widely expected to maintain its current policy in December as the central bank aims to encourage a sustainable recovery.  The central bank will also likely maintain pledge to keep borrowing costs at the record-low for an extended period of time.  However, Fed Chairman Bernake may hold an improved outlook for future growth and inflation as the world’s largest economy emerges from the worst recession since the Great Depression.  Any signal from the Fed as to when they may start removing quantitative easing and eventually raise interest rates will likely boost the dollar. 

 

The Euro tipped higher against the greenback, slightly pulling back from its two month lows against the dollar.  The Euro may continue to trade on the back foot as European policy members hold a dovish outlook for inflation.  European Central Bank member Ewald Nowotny reiterated that there is no “strong need” to normalize policy during the first half of 2010, and does not see any “major threats for price stability in the near future” as the central bank expects a moderate recovery going into the following year. Meanwhile, consumer prices in the Euro-Zone increased 0.1% in November after expanding 0.2% in the previous month.  In addition, the core rate of inflation unexpectedly slipped to an annual pace of 1.0% from 1.2% in the previous month. The slump in price growth is likely to lead the ECB to hold a neutral policy stance going into the following year.

 

The Japanese yen was largely unchanged against the dollar overnight. However, the U.S. dollar was able to hold onto yesterday’s one percent gain against the yen.  A slight rise in global equities weighed on both the dollar and yen as investors shifted away from the safe-haven currencies.  However, the yen is likely to trade in tight ranges as market participants focus on future monetary policy in the U.S. following this afternoon’s Fed rate decision. 

 

The Sterling gained against its major counterparts overnight following an unexpected drop in unemployment in the U.K but the pound will likely trade in ranges ahead of this afternoons Fed decision in the U.S.  Claims of unemployment benefits in the U.K. unexpectedly slipped 6.3K in November after rising a revised 5.9K in the previous month.  The numbers marked the first decline since February of 2008, adding to signs the economy is recovering from its worst slump in decades.