US Dollar, Japanese Yen Gain as US GDP Figures Push the DJIA Down to Critical 8,000 Level

US Dollar, Japanese Yen Gain as US GDP Figures Push the DJIA Down to Critical 8,000 Level
The US dollar and Japanese yen remained in demand on Friday, second only to the British pound, as US economic data fueled risk aversion in the markets and actually led the Dow Jones Industrial Average to fall 1.82 percent to close just above critical support at 8,000. According to advanced reports, the US economy contracted in Q4 by the most since Q1 1982 at a rate of 3.8 percent, marking the second consecutive quarter of contraction. This was actually a bit better than forecasts, as a Bloomberg News poll shows that economists had expected a decline of 5.5 percent. All told, US real GDP for 2008 slowed to a 1.3 percent pace of growth, the lowest since 2001. The decline in GDP could be attributed to a variety of factors, including a 3.5 percent drop in personal consumption, a 12.3 percent decline in gross private investment, and a 19.7 percent plunge in exports. We already know that the US has been in recession since December 2007, per the National Bureau of Economic Research (NBER), but one of the bigger questions now is how long the recession will last for. It will be important to watch gauges of employment and business activity for the early months of 2009, as the latest trends suggest that GDP could continue to fall sharply in Q1 and Q2. Also worth keeping in mind that today's GDP report is simply the advanced reading, and with two more revisions due out on February 27 (preliminary) and March 26 (final), these figures could ultimately change dramatically.

The release of personal income and personal spending figures for the month of December is likely to highlight the dismal status of consumption in the US. Income is forecasted to contract for the second consecutive month at a rate of 0.4 percent, and perhaps even worse, spending is anticipated to contract for the sixth straight month at a rate of 0.9 percent. The impact of the reports on the markets may be limited since Q4 GDP has already been announced. Unlike these releases, the ISM Manufacturing index will give a more timely view of conditions in the economy. The index is anticipated to fall to a nearly 29-year low of 32.5 in January from an upwardly revised 32.9. This would mark the twelfth straight month of contraction in business activity, suggesting that the recession could continue through at least the first half of 2009. Weaker than expected results could lead flight-to-safety to push the US dollar higher, while surprisingly strong numbers could weigh the currency down.


**For a full list of upcoming event risk and past releases, go to the DailyFX Calendar.