What Could be a Big Surprise for the US Dollar?

This is an excerpt from my DailyFX Report on the day’s currency market movements:

The currency market was fairly quiet today with the US dollar rallying against some currencies and falling against others.

Jobless claims were the only piece of data released and filings for unemployment dropped by 58k to the lowest level in 3 months. The goods news however was shrugged off by the markets because the data is distorted by seasonal shutdowns in auto plants. This happens every summer in the month of July and lasts for about two weeks. According to the Labor department, their seasonal adjustment formula prices in auto layoffs in the first 2 weeks of July and fewer occurred last week than expected. Excluding the seasonal adjustment, claims actually increased by 30k while continuing claims rose by 91k.

With companies such as Starbucks, Citigroup and Air Tran announcing layoffs in the past month, the labor market will worsen before it improves. Despite the bad news, the US dollar may be in for a big surprise.

A difficult labor market, the decline in the stock market and the rise in food and energy prices are expected to force US consumers to reduce spending. However judging from the monthly reports from retailers, consumer spending may not be that bad. Discounters like Wal-Mart, Costco and Target all reported stronger sales in the month of June as consumers continue to spend their tax rebates. If retail sales remain positive, the US economy may avoid double dipping, which would be a nice surprise for the US dollar.

Fannie Mae and Freddie Mac’s potential solvency problems were the biggest news in the financial markets today. They are too big to fail and we believe that the US government will exhaust their options before allowing this to happen because preventing or mitigating future crisis is Bernanke and Paulson’s top priority. Fed President Yellen even said today that the Fed has the potential to further ramp up facilities if needed. Meanwhile the US trade balance and consumer confidence reports are due for release tomorrow. The rise in the export component of the manufacturing ISM report suggests that the trade balance will improve, but any dollar rally could be offset by the consumer confidence report which will be released shortly thereafter. More strain on the US economy should lead to weaker consumer confidence.

Read the rest of the report here

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