Dollar Slides on Improved Risk Sentiment, Fed Rate Cut Expectations

US Producer Price Index and Advance Retail Sales reports printed roughly at consensus forecasts, and a subsequently unchanged outlook for inflation and consumer spending left the dollar relatively stable through morning New York trade. Yet the bulk of dollar losses occurred in the overnight Tokyo session, with a whopping 4.9 percent rally in the Hang Seng Index and a 2.5 percent surge in the Japanese Nikkei 225 fueling demand for highly speculative carry trades. Given that the dollar has consistently lost in the face of rallying equity markets, it is little wonder that the greenback gave back all of its early-week advance on a strong performance in Asian equity indices. That said, it is unsurprising to note that the dollar recovered some of its losses as the Dow Jones Industrial Average slipped through afternoon trade.   

The Dow initially rallied 63 points soon after the morning open, but flagging bullish interest dragged the index to a +16 points just an hour ahead of the close. The S&P 500 showed similar price action and remained 3 points up to 1,484 through time of writing. Yet modest gains did not spread to the recently volatile NASDAQ Composite index. Tech stocks underperformed the broader market and pushed the NASDAQ 0.3 percent lower to 2,665. 

US Treasury Market trading was similarly muted, and the yield on the 2-Year Treasury note rose a single basis point to 3.55 percent. The 10-year Note was likewise 1 basis point higher to 4.27 percent, while the December Fed Funds Futures contract gained 1.5 basis points in implied yield to 4.37 percent. Futures traders now price in an approximate 72 percent chance that the Federal Reserve will cut interest rates by 25 basis points at its upcoming meeting. All else remaining equal, expectations for falling US yields will keep the US dollar offered through upcoming forex trade.   

Written by David Rodríguez, Currency Analyst for DailyFX.com