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US Dollar Bounces From Technical Support Despite Worst US GDP Reading Since Q3 2001

Thursday, 30 October 2008 22:47:36 GMT  |  Terri Belkas, Currency Strategist

The US dollar gained throughout most of the day on Thursday as the currency rebounded from critical support and despite the release of US economic data that added to evidence that the nation is facing recession.

The advance annualized reading of US Q3 GDP fell by the most since Q3 2001 at a pace of 0.3 percent, after jumping 2.8 percent in Q2. This was slightly better than the -0.5 percent estimate projected by economists, but this was really the sole “positive” aspect of the report as a breakdown of the shows that conditions may only get worse. Indeed, export growth cooled to a 5.9 percent pace during the quarter, down from 12.3 percent, and with many of the world’s developed economies slowing at the same time, foreign demand for US goods is bound to deteriorate further. In addition, personal consumption plunged 3.1 percent, marking the first contraction since 1991 and the worst decline since 1980. This isn’t entirely surprising as consumer credit growth during the month of August fell for the first time in over 10 years and by the most since record-keeping began in 1943. It has become very clear that the credit crunch has taken its toll on consumers that are accustomed to living off of debt via credit cards and home equity loans, which has been to the detriment of retailers as advance retail sales fell negative in September for the third consecutive month.

Overall, this news leaves the Federal Reserve all the more likely to cut rates down to record lows before year-end, as indicated by fed fund futures which are fully pricing in a 25bp cut on December 16 and a 65 percent chance of a 50bp cut. Data due to be released on Friday may exacerbate this sentiment, as personal income and personal spending numbers for the month of September are likely to disappoint amidst slowing growth, a deterioration of the labor market, and tight credit conditions. In fact, personal income is forecasted to rise a tepid 0.1 percent while personal spending is anticipated to fall 0.2 percent, marking the first negative reading in two years.

Related Articles: How Will A Rate Cut And Recession Affect The Dollar's Reserve Status?, The Fed Cuts 50bps But Can Rates And Recession Turn The Dollar?

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