Euro Nears Record Highs, but Fed’s Lockhart Slows Dollar Drop on Hawkish Comments

The Euro rallied just 36 points short of all-time highs against the dollar, trading above the psychologically significant $1.3800 through time of writing. The British Pound was similarly bid against the greenback, scaling heights of $2.0330 before a later ease on profit taking. Sterling gains were limited by a simultaneous rebound in the Japanese Yen, with the dollar losing ¥.61 off of intraday highs to ¥113.38 on the afternoon.

Economic event risk was limited to a number of speeches from key US Federal Reserve officials, with Atlanta Fed President Dennis Lockhart downplaying the likelihood of aggressive monetary policy accommodation by the central bank. The Fed official said that “"Friday's [labor] data ... show employment was beginning to soften back in June. This news should be evaluated with recently positive reports in retail sales.” In other words, he is concerned with the slowdown in jobs growth, but there remain other important factors to consider in his overall assessment for the economy. This leaves markets incredibly data-dependent through the short term, with Friday’s Advance Retail Sales report to prove especially important ahead of the Fed’s September 18 meeting. If we see retail sales surprise strongly in either direction, expectations for the central bank’s Fed Funds rate will likely follow suit.  

Domestic equity markets initially displayed their disappointment with Lockhart’s comments on the economy, but a later bounce in risk appetite led the major indices higher ahead of the close. The Dow Jones Industrial Average was the best performer on the trading day, adding 63 points to 13,176. The S&P 500 Index and the NASDAQ Composite were similarly bid, with both indices adding 0.4 percent to 1,458 and 2,576, respectively. Rallies in corporate shares will only doom the dollar to further drops against European counterparts, as signs of risk appetite ease fears of a further greenback rally.

Fixed income markets likewise saw a significant reversal through the US trading session, as formidable rallies gave way to easing through time of writing. The highly risk-sensitive 2-year Treasury Note initially lost 10 basis points in yield to lows of 3.80 percent, but the key debt issue fell to yield 3.85 percent. Action in the 10-year Note was similar, with the return on the longer-dated bond off 5 basis points to 4.33 percent.