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US Dollar Gains On Risk Aversion, Will Weak US Consumer Confidence Finally Cool the Rally?

Monday, 27 October 2008 22:51:49 GMT  |  Terri Belkas, Currency Strategist

The US dollar rallied across the majors during the European trading session, but subsequently pulled back later in the day despite stronger-than-expected US economic data.

Indeed, the Commerce Department reported that US new home sales rose 2.7 percent in September from a month earlier to an annual rate of 464,000. Looking at a breakdown of the report, supply levels eased to 10.4 months from 11.4 months while median prices dropped 9.1 percent from a year earlier to $218,400, suggesting that the lower values are encouraging buying. However, with credit conditions remaining stringent, it may be difficult for homebuyers to get mortgages. Combining that with the deterioration in the labor markets and clear economic slowdown in the US, and the outlook for the housing sector doesn’t look good. Thus, I’m a bit skeptical of this “positive” report and wouldn’t go so far as to call it an indication of a bottom. Instead, I think residential investment will continue to create a drag on the economy, which should be reflected in Thursday’s Q3 US GDP figures.

Looking ahead to Tuesday, the release of US economic data may highlight some of the reasons why most believe the country is in midst of a recession. Indeed, at 9:00 ET, the August reading of the S&P/Case-Schiller index of home prices is likely to fall by 16.6 percent from a year earlier, marking yet another record decline. Later in the morning at 10:00 ET, the Conference Board’s consumer confidence index is forecasted to drop to 52.0 in October from 59.8. While this would still be above the June low, it would be a historically dismal number as the record low from December 1974 looms at 43.2 (records go back to 1967). These economic releases have the potential to weigh on the US dollar, as they will add to speculation that the Federal Reserve will cut rates sharply on October 29. However, if risk trends continue to dominate the markets, the greenback may brush off the data and gain on flight-to-safety.

Related Article: How Will A Rate Cut And Recession Effect The Dollar's Reserve Status?

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