eur fundamentals

US Dollar Reclaims Lost Ground Despite New Lows In Consumer Spending, Housing Sales And Durable Goods

Wednesday, 26 November 2008 21:49:13 GMT  |  Terri Belkas and John Kicklighter, Currency Strategists

Traditional fundamentals were painting a dour picture of the US economy; but the greenback was nonetheless rising into the holiday liquidity drain. Notably, the euro’s tentative trend reversal was cut short by a pull back towards 1.2825 while the pound pulled back from 1.55 in a 300 point plus intraday dip.

Setting the scene for recession speculation, personal spending in the US contracted by the most since September 2001 at a rate of 1.0 percent, despite a 0.3 percent rise in personal income, as consumers opt to save or pay off debt. Meanwhile, US durable goods orders dropped a whopping 6.2 percent during October, marking the third consecutive contraction and worst decline in two years, and even excluding transportation, orders fell by the most since 2002. Furthermore, non-defense orders excluding aircraft also tumbled for the third straight month at a rate of 4 percent, suggesting that business investment is slowing dramatically. Finally, the Commerce Department reported that new home sales dropped 5.3 percent through October to a 433,000 annual pace, the lowest since January 1991. A breakdown shows that inventories rose to 11.1 months’ supply while median prices fell 7 percent from a year earlier to $218,000.  Overall, the data suggests that consumption is falling rapidly, as we’ve already seen reflected in the Q3 GDP figures, and with the labor markets and housing sector still deteriorating and credit conditions remaining tight, consumer spending could easily take a toll on Q4 GDP figures as well. In light of this, businesses are cutting back on spending and investments as well, since both domestic and foreign demand are sure to slow further in coming months. This leaves the Federal Reserve very likely to cut rates again when they meet on December 15-16, especially as fed fund futures are fully pricing in a 50bp cut to 0.50 percent and a 32 percent chance of a 75bp reduction.

There is no US data scheduled to be released through the end of the week due to the Thanksgiving holiday on Thursday. As a result, US markets will be closed tomorrow and will stop trading early today and on Friday. Nevertheless, the forex markets and foreign stock and bond markets will be open as usual and we tend to see one of two things happen during these times of lower volumes: extremely quiet price action or a pick up in volatility. Considering the sustained levels of high volatility in the market, we would expect the latter; however, the tentative trend breaks from Monday may have mitigated the breakout potential that could have been.

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