Euro and Oil Set Fresh Record Highs, but Markets Remain Calm Ahead of Key Event Risk

The euro reached fresh record highs of $1.3915 against its US counterpart, as the NYBOT-traded Dollar Index fell to a new 25-year low. Greenback tumbles were not universal, however, as a fast-declining British Pound shed 64 points off of intraday highs to $2.0301. The Japanese Yen finally caught a break on the US dollar drops, with the American currency losing ¥0.15 to ¥114.11.

An empty day of economic event risk allowed traders to sell the dollar on rallies in oil prices. The NYMEX-traded West Texas Intermediate contract rose to record-highs of $80.18 per barrel, further ‘fueling’ the greenback sell-off. Despite the fact that oil is broadly traded in US$, markets largely believe that higher prices signal further currency diversification efforts by major oil producing countries. In other words, analysts claim that authorities are more likely to sell the dollar against the Euro and other major counterparts as greenback-denominated oil funds flow into their respective countries.  

The dollar tumbles showed signs of slowing near the New York close, as traders remain hesitant to force major currency movements ahead of key economic event risk. Friday’s US Advance Retail Sales figures will be the clear highlight of the week, as expectations for the future of domestic interest rates will depend on the strength in retail consumption. Given current market forecasts for a mere 0.3 percent chance of unchanged interest rates through the Fed’s September 18^th meeting, speculators are clearly gearing up for bearish US economic data. Yet any strong surprises to the topside could easily dent such sentiment and cause similar moves in the US dollar.

Domestic equity markets remained relatively unchanged despite surging energy costs, with the Dow Jones Industrial Average off 15 points to 13,292. The S&P 500 was almost exactly flat through the New York Stock Exchange close, shedding 19 cents to 1,471. Tech stocks saw a similarly uneventful trading session, with the NASDAQ Composite 0.2 percent down to 2,591. 

Fixed income markets were unsurprisingly stable in the face of equity market calm, with the 2-Year Treasury Note staying flat to yield 3.93 percent. The longer-dated issues were slightly off of yesterday’s pace, with the 10-Year Treasury adding 3 bp in yield to 4.40 percent. Despite the lack of volatility, this may simply represent the calm before the storm on Friday’s Retail Sales data.

Written by David Rodriguez, Currency Analyst for DailyFX.com