Holiday Trading Conditions Arrive, U.S. Dollar Mostly Unchanged

European Session Summary

Higher yielding currencies advanced slightly against the U.S. Dollar in the overnight, but data ahead of the North American trading session helped the Greenback take back some of its losses. A slew of American data at 13:30 GMT painted a cloudy picture as to where the United States’ economy is headed, weighing on risk-appetite. While the durable goods figure for December, at 3.8 percent month-over-month, beat expectations, personal income and spending data severely disappointed. Similarly, the savings rate dropped again.

As noted in October, “if the savings rate is falling while inflation adjusted income contracts, the math shows that there will be a necessary pullback in consumer spending in the coming periods. This is a poor signal for the U.S. economy, which after nearly four years underwater has finally grown back to its pre-recession output level. Consumption accounts for nearly 70 percent of the overall growth figure, and if recent consumer trends are unsustainable, a recession in 2012 cannot be ruled out just yet.”

If the U.S. economy does enter another recession, it appears that the Federal Reserve is prepared to expand its balance sheet for a third time through further mortgage backed securities (MBS) purchases. As history has shown, the Federal Reserve’s quantitative easing plan does little more than reduce income adjusted for inflation and rapidly devalue the U.S. Dollar.

Dow Jones FXCM Dollar Index: December 2011

Charts created using Strategy Trader– Prepared by Christopher Vecchio

Overall, the shakeout following the data release put the U.S. Dollar back near the top of the board for the day, though it continued to trade slightly lower against the commodity currencies, the Australian, Canadian, and New Zealand Dollars, at the time this report was written. On the flip side, the European currencies were the worst performers, with the Euro barely participating in the overnight session’s ramp up in equities.

24-Hour Price Action

Key Levels: 14:05 GMT

Thus far, on Friday, the Dow Jones FXCM Dollar Index is slightly lower, trading at 9970.92, at the time this report was written, after opening at 9971.76. The index has traded mostly lower, with the high at 9973.43 and the low at 9944.46.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com.

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, send an e-mail with subject line "Distribution List" to cvecchio@dailyfx.com.