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Carry Trade Leaves Dollar in the Dust, Dow Rallies to Further Sink the Yen

Friday, 24 August 2007 19:23:49 GMT  |  David Rodriguez, Currency Analyst

The US Dollar posted its strongest losses on the week, as a sharp return to carry trades led the safe-haven currency lower against risk-friendly counterparts. Impressively strong New Home Sales and Durable Goods Orders data actually served to push the dollar lower through morning trade, as signs of optimism in the US economy eased worries of a slowdown in global expansion. 

The Euro remained as one of the primary beneficiaries of risk-linked speculative interest, rallying an impressive 110 points to $1.3671. The British Pound was certainly no exception, as the carry trade favorite added over 150 points off of overnight lows to $2.0130. Continued interest in high-yielding forex carry trade pairs made the Japanese Yen the biggest decliner on the day, with the downtrodden dollar improving ¥0.50 to ¥116.10.

Strong US economic data arguably hurt the dollar’s prospects, with real estate and capital expenditures data coming in far above consensus forecasts. US Durable goods were better than expected through the month of July, with the key Ex-Transportation figure at its highest levels since 2004. In fact, Capital Goods expenditures grew by an impressive 8.3 percent; ex-aircraft gained a healthy 2.2 percent on the month. Looking at the breakdown, it seems as though Machinery and Primary Metals as well as Computers and Electronics made up the bulk of the gains. Shipments likewise proved bullish, recovering from June's 1.1 percent decline to a 3.8 jump through more recent data. This takes the 3-month annualized number to a respectable 5.9 percent for Capital Goods—an unexpectedly optimistic sign for the future of domestic industry. It seems as though capital investment may provide the silver lining in the currently dark cloud over the US economy, with a recovery in business spending to undoubtedly boost prospects for broader economic expansion.  

Later New Home Sales figures likewise improved growth prospects for the world’s largest economy, with the headline print showing strong gains in both sales and prices through the month of July. In fact, the headline showed a very healthy 870,000 annualized pace of sales versus 820,000 expected, while the previous month was revised 12,000 higher to 846,000. This came on a 2.8 percent monthly gain in prices—the first such growth since April. A more in-depth look shows that the overall improvement in prices and sales occurred primarily in the Western regions of the country, but it nonetheless serves to note that two of the other three major regions remained stable through the period. The sole exception was the Northeast, which saw sales plummet 17k to 53k from June levels. Yet the region remains above its earlier-year pace and has improved on a year-to-date basis.

The Dow Jones Industrial Average was one of the major beneficiaries on the home sales data, rallying 100 points to 13,336 at time of writing. Previously downtrodden tech stocks likewise benefited from renewed optimism, with the NASDAQ Composite improving 1.0 percent to 2,567. The S&P 500 followed in the Dow’s footsteps, adding 12 points to 1,474.

 

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