U.S. Dollar Slumps as Debt Ceiling Deadline Approaches

The U.S. Dollar faced increasing headwinds in the Asian and European sessions after yesterday’s news in the intermarket hours that Moody’s would be placing the U.S. government’s Aaa rating on review for a possible downgrade. Moody’s noted that the impasse in negotiations has increased the “possibility that the statutory debt limit will not be raised on a timely basis,” which would lead to a default on U.S. Treasury debt obligations.

Although Moody’s noted that “there is a small but rising risk of a short-lived default,” pressure remained on the U.S. Dollar, with the Dollar Index retracing all of its gains since July 5. In similar debt-related news, European bond markets remained under siege from wary market participants, with Italian government bonds sinking to a three-year high following the sale of 5-year bonds today. It’s clear that the markets are losing faith in the Euro-zone’s ability to support its members, with Italian 10-year yields climbing 5.65 percent, at the time this report was written. Similarly, Ireland’s yields reached records, while German 10-year Bunds gained amid a small flight to safety.

Dollar-Yen 1-minute Chart: July 14, 2011

Charts created using Strategy Trader– Prepared by Christopher Vecchio

In data ahead of North American trade, U.S. advance retail sales data showed little growth as it became increasingly clear that an eroding labor market has weighed on consumers’ purchasing decisions, amid fears that current income may not be the perpetuity it once historically was. The 0.1 percent gain in June, as per the report issued by the Commerce Department today, beat the 0.1 percent contraction forecasted, according to a Bloomberg News survey.

The other components of the release didn’t instill the confidence markets had hoped for, with the retail sales less autos figure showing no change, after gaining by 0.3 percent in May, while the retail sales ex auto & gas figure fell short of expectations, gaining 0.2 percent in June versus the 0.4 percent forecast.

U.S. Advance Retail Sales (JUN): July 2008 to Present

Courtesy: Bloomberg

Following the release of the data, the Dow Jones FXCM Dollar Index found itself being dragged lower on a boost to risk-appetite, with the index falling from 9564.43 to as low as 9543.14. At the time this report was written, the index was trading at 9545.87. Overall on the day, the index found support after being absolutely battered on Wednesday, when it retraced all of its gains since July 5. At the time this report was written, it remained off of session lows, which occurred around 9:20 GMT, when the index was trading at 9537.52.

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Fundamental Headlines

• Obama May Call Lawmakers to Camp David – Bloomberg

• U.S. Stock-Index Futures Gain on JPMorgan – Bloomberg

• Weekly Claims Finally Show Decline in Weak Jobs Market – CNBC

• Yield on Italy Bonds in Auction Highest Since 2008 – CNBC

• Italy Expected to Pass crucial Bond Auction Test – Reuters

NZDUSD: The NZD/USD pair was the strongest currency pair for the second straight session, on a combination of Dollar-weakness stoked by a Moody’s review on the U.S. government’s Aaa rating, coupled with better-than-expected growth figures for New Zealand, which sent market participants speculating that the Reserve Bank of New Zealand would raise the key interest rate at sometime in the coming months. In June, Reserve Bank Governor Alan Bollard noted that the pace and timing of interest rate hikes will be guided by the speed of the recovery; with the 0.8 percent reading, beating the 0.3 percent forecast, it is clear that the antipodean nation’s economy was stronger than previously thought.

Taking a look at price action, the NZD/USD pair has now appreciated over 300-pips in the past two trading sessions, rallying to a fresh all-time high in the overnight, at 0.8505. Considering it is hard to identify tops in such a trend, in which price action is marked by higher highs and higher lows in an ascending channel, for now, with weakness building in the U.S. Dollar, the pair could run higher.

Written by Christopher Vecchio, Currency Analyst

To contact the author of this report, please send inquiries to: cvecchio@dailyfx.com

Follow Christopher Vecchio on Twitter: @CVecchioFX