US Dollar Advances as Consumer Confidence Drops to 30 Year Low

THE TAKEAWAY: Consumer Confidence Well Below Expectations > Economic Uncertainty Increasing > US Dollar Bullish

The U. of Michigan Consumer Sentiment Index, a leading indicator of consumer confidence, fell to its lowest level since 1980. The August reading printed at 54.9, significantly below economists’ expectations of 62.0. Weak employment data and recent extreme volatility in the financial markets have sparked concerns in consumers that the possibility of a double dip recession is increasing. A drop in the sentiment indicator, especially of this magnitude, signals that consumers are likely to pull back on spending. With GDP growth already stagnating in the first half of 2011, the depressed mood of consumers adds to a growing list of issues that require significant reversals to ignite a strong recovery.

EUR/USD 1-minute Chart: August 12, 2011

Charts created using Strategy Trader– Prepared by Sonu Sadarangani

The EUR/USD currency pair reacted immediately to the disappointing data. The U.S. Dollar gained climbed 22 basis-points in the minute following the release before paring its gains. The reversal was short lived as the Dollar continued its rally versus the euro. A possible reason for strength in the U.S. Dollar following weak data stems from the fear that a major slowdown in the U.S. economy would be harmful to global economies. To avert the risks from spreading, investors are encouraged to bring money back home, boosting the demand for US assets/currencies.

The August reading provides increasing evidence that consumer’s outlook on the economy is growing rapidly pessimistic. The index had been steadily climbing following the 2008 global crisis and topped 75 earlier this year. Since May 2011, the index has plummeted from just under 75 to its current level at 54.9 as sovereign debt fears in Europe began to escalate and the U.S. economy entered a soft patch. A drop in the Bloomberg Weekly Consumer Comfort Index below expectations further reveals declining consumer confidence.

Written by Sonu Sadarangani, DailyFX Research