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Dollar Falls While Carry Trade Bounces, Treasury Yields Suggest Movements May be Short-lived

Tuesday, 04 September 2007 17:26:25 GMT  |  David Rodriguez, Currency Analyst

The US dollar edged lower through the day’s trade, as a small bounce in the forex carry trade erased earlier gains against major trading counterparts. Mildly disappointing economic data did little to sway the Dow Jones Industrial Average, which continued inching higher on the moderation in risk aversion across financial asset classes. Yet significant event risk in the week ahead may cause further market volatility, leaving traders on the defensive through short term trade. 

The Euro initially lost significant ground against its American counterpart, breaking below the $1.3600 to lows of $1.3550; the single currency later regained traction and moved to $1.3611 through time of writing. The British Pound was likewise slightly improved following the greenback’s overnight rally, rallying 72 points of its lows to $2.0142. All the while, the Japanese Yen was the biggest decliner on the day. The risk-friendly environment allowed speculators to push the dollar ¥0.23 improved to ¥116.17.

Morning economic data failed to reassure markets on the prospects for future US economic expansion, with the key Institute of Supply Management Manufacturing Index printing slightly below consensus forecasts for the month of August. The closely-followed industrial number produced its worst result since March, as a drop in demand for domestic production led related sub-indices lower. Most notably, New Orders dropped 2.2 points to 55.3, while the backlog of orders narrowly remained positive at 50.5 versus 52.0 previous. All signs pointed to dimming prospects for the US manufacturing sector, except to note that Employment actually produced its best growth since May at 51.3. Though the gain of 0.9 index points is hardly earth-shattering, it does provide a cautiously bullish outlook for industrial employment ahead of Friday’s critical US Non Farm Payrolls report. 

Domestic equity markets proved largely receptive to the morning’s economic data, with the Dow Jones Industrial Average improving 0.4 percent to 13,409 at time of writing. Technology and energy shares were responsible for much of the gains, with renewed bullishness on earnings prospects for Apple Corp. and rising oil prices boosting outlook for industry giant Exxon. The S&P 500 was subsequently bid an impressive 0.9 percent higher to 1,487. The largest percentage gainer on the day was the NASDAQ Composite, which saw a 30 point advance to 2,626. Traders remained cautiously bullish domestic corporate shares, but bulls may be in for a rough ride in what is typically the worst month for domestic stock markets. Our DailyFX Research team has recently published a report showing the potential effects of a stock market decline on the USDJPY. See here for the full report.

Government Treasury Bonds were unsurprisingly on offer through the afternoon, with the 10-Year Treasury Note shedding 3/16 points in price to 101 and 17/32. Yields were three basis points higher to 4.55 percent. It nonetheless serves to note that the shorter-dated 2-year Note remained flat at 4.14 percent. Markets clearly remain hesitant over medium term risk and growth prospects, with the shorter-dated Treasury yields at their lowest since 2005.  

Written by David Rodriguez, Currency Analyst for DailyFX.com 

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