Dollar Prospects Remain Dim on Treasury Yield Tumbles, Falling Dow Doesn’t Help

An afternoon NAHB Housing Market Index result showed that home builder confidence remained unchanged through the month of November—the first time it failed to drop since February. Of course, the above-consensus result left the headline index at its lowest levels on record, and economists saw few reasons for renewed optimism in the domestic housing sector. Given such pessimistic builder confidence, it remains relatively clear that we will see further declines in new housing starts through the medium term. Such a trend removes a key source of employment for domestic construction workers and only contributes to the gloom surrounding the current US housing recession.  

Domestic equity indices remained unmoved by the marginally better-than-forecast NAHB result, and renewed pessimism over the future of corporate profits led the Dow Jones Industrial average below the 13,000 mark for the first time in a week. A mild rebound kept the index 1.3 percent worse to 13,010, but risks seemingly remain to the downside through short-term trade. The S&P 500 lost a similar 1.3 percent to 1,440, while the NASDAQ Composite fell 1.2 percent to 2,605.

US Treasury markets continued their tremendously volatile trade, and the 2-year Note shed a further 14 basis points in yield to a paltry 3.20 percent. A combination of investor risk aversion and a bearish outlook for short-term interest rates have led Treasury Bond prices significantly higher through recent trade. We will need to see a substantial improvement in risk sentiment to see a reversal in the key debt instruments. Otherwise, the dollar will continue to lose ground on worsening interest rate differentials against major forex counterparts. 

Written by David Rodríguez, Currency Analyst for DailyFX.com