US Dollar Down as US Trade Deficit Widens, Consumer Confidence Falters

US Dollar Down as US Trade Deficit Widens, Consumer Confidence Falters
After staging a strong rally on Thursday, the US dollar eased back on Friday and ultimately ended the week down against all of the majors. In fact, the greenback lost over 2 percent against the New Zealand dollar and Canadian dollar, and 1.5 percent versus the Australian dollar. When compared to the rest of the majors, though, the currency’s losses weren’t substantial, as the US dollar index (DXY) managed to hold above its 2009 lows. According to data released this morning, the US trade deficit widened by 18 percent during September to $36.5 billion, the highest since January. The dynamics behind this shift weren’t necessarily bad, as the 2.9 percent growth in exports was simply overrun by a 5.8 percent surge in imports, reflecting an increase in consumption and prices. This same scenario could play out in the next round of trade readings, as import prices increased 0.7 percent in October, marking the third straight rise and pushing the annual rate up to -5.7 percent from -12.0 percent. In other US economic news, the University of Michigan’s consumer confidence index unexpectedly fell to a three-month low of 66.0 in November from 70.6. A breakdown of the report shows declines in sentiment on both current economic conditions and the outlook, suggesting that the steady rise in the unemployment rate to 10.2 percent is bringing about more pessimism amongst consumers.

Looking ahead to next Monday, the Commerce Department is forecasted to report at 8:30 ET that US retail sales rose 0.9 percent in October, after tumbling by the most in eight months during September on weaker car sales. Likewise, the retail sales index excluding autos is projected to increase by 0.4 percent, but looking at the University of Michigan’s consumer confidence report and MasterCard Advisors' SpendingPulse report, the results could be disappointing. The index showed that retail spending excluding autos went unchanged in October, and excluding autos and gas, spending plunged 2.3 percent. Indeed, advance retail sales index is not adjusted for inflation, so volatile gas prices can often play a big role on how the overall results fare, and based on the surge in average retail gasoline prices during October from $2.46/gallon up to about $2.69/gallon, there are upside risks to the headline result, and downside risks for the index excluding autos and gas.

Then, at 12:15 ET, Federal Reserve Chairman Ben Bernanke will be speaking about the US economic outlook from New York, but if his comments reflect a sentiment similar to that of San Francisco Fed President Janet Yellen, Atlanta Fed President Dennis Lockhart, Boston Fed President Eric Rosengren, and Richmond Fed President Jeffrey Lacker, interest rate expectations could fade further. The general sentiment in the other speeches made by central bank officials earlier this week indicated that interest rates are likely to remain unchanged through much of next year, with Lacker saying that it was “too soon to say” if the Fed may consider raising rates in 2010. A reiteration of this sentiment by Bernanke could exacerbate US dollar weakness, but if his comments indicate disappointing prospects for growth, risk appetite could take the greater hit.

Related: US Dollar Could See Reversals on US Retail Sales, Speech by Fed’s Bernanke

British Pound Mixed Ahead of UK CPI, Bank of England Meeting Minutes Next Week
The British pound was mixed on Friday, falling against the New Zealand dollar, Australian dollar, and Japanese yen while gaining versus the rest of the majors as there was no new UK economic news to speak of. Event risk will pick up on Tuesday, though, when the UK’s consumer price index (CPI) reading for the month of October is expected to rise 0.1 percent, but the more important part of this report is that the annual rate of growth, which is more closely watched by the Bank of England, is forecasted to climb up to 1.4 percent from 1.1 percent, keeping inflation within the central bank’s acceptable range of 1 percent - 3 percent, but below their 2 percent target.

On Wednesday, the minutes from the BOE’s November meeting will be released, and while we already that they left rates unchanged at 0.50 percent and expanded their quantitative easing program by £25 billion to £200 billion, there are a variety of potential comments that could impact the British pound. First, the vote count may reflect some difference in opinion amongst the Monetary Policy Committee (MPC) members on the adjustment to the Asset Purchase Facility (APF), as BOE Governor Mervyn King has been more dovish in this regard in the past. Indeed, indications that some MPC members voted for a larger increase in the APF would likely lead to a steep drop in the British pound as it would cause traders to shift their expectations for interest rate decisions in 2010, with Credit Suisse overnight index swaps currently pricing in 75.5 basis points worth of rate hikes by the BOE over the next 12 months.

Related: Discuss the British Pound in the DailyFX Forum

Euro Under Pressure as Q3 GDP Misses Expectations
Though the euro appreciated against the US dollar on Friday, the currency fell against the rest of the other major currencies on news that the Euro-zone’s third quarter recovery wasn’t quite as robust as expected, as GDP rose by 0.4 percent from the second quarter, missing forecasts for a 0.5 percent increase. Since this was the advanced reading of the index, there was no breakdown available, but the increase was likely the result of a mild recovery in export demand. However, consumption may have remained weak, as services PMI for the region did not rise above 50 – signaling an expansion in business activity – until September. The news didn’t have much of an impact on rate expectations for the European Central Bank, as Credit Suisse Overnight index swap (OIS) rates continue to price in 83 basis points worth of hikes over the next 12 months. Additionally, ECB Executive Board member Jose Manuel Gonzalez-Paramo said that he couldn’t rule out raising rates while some Euro-zone countries are still in recession, and while such a move would be “less fitting” for those countries, the national governments “will have to understand that.”

Related: Discuss the Euro in the DailyFX Forum

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Written by: Terri Belkas, Currency Strategist for DailyFX.com
E-mail: tbelkas@dailyfx.com