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US Dollar Bounces Back on Dismal Jobless Claims and Durable Goods Orders - What Gives?

By , Quantitative Strategist
25 October 2007 17:26 GMT

The euro rallied just shy of record highs at $1.4344 through early New York trade, while a subsequent reversal saw the single currency at $1.4300 through time of writing. Forex speculators forced similar movements in the British Pound and sent it to 3-month peaks at $2.0550 before later pullback. Broad US dollar weakness extended to the similarly downtrodden Japanese Yen, as the greenback lost 0.35 yen to 113.90 through the afternoon. 

Morning economic data only served to compound fears of an extended US economic slowdown, with both Initial Jobless Claims and Durable Goods Orders data falling noticeably below consensus forecasts. The former showed that claims for unemployment insurance continued at a very elevated pace of 331,000 through the week ending October 20. The latter reported the second consecutive monthly drop in Durable Goods for the first time since August, 2006. Such data compounded fears that troubles in housing and lending markets would spread pessimism to other sectors of the economy, limiting hiring and further business investment. Yet it is interesting to note that interest rate markets showed very limited reactions to the reports; implied yields on the November Fed Funds Futures contract remained exactly unchanged through time of writing. Futures traders have currently priced in an approximately 14 percent chance that the Federal Reserve will cut interest rates by 50 basis points in its October 31 meeting. 

Hopes for a large interest rate cut initially bolstered domestic equity indices, but continued reports of financial lending problems exacerbated fears of a crimp on corporate profits. The Dow Jones lost 65 points to 13,620, while the S&P 500 fell a similar 9 points to 1,507. Speculative technology companies were much worse off, with the NASDAQ Composite losing a much larger 1.1 percent to 2,744.

US Treasury Yields showed far smaller price movements on the day, with the key 2-year Note yield remaining relatively unchanged at 3.71 percent. Bond traders seemed relatively unaffected by morning economic data, and indeed, speculators may grow increasingly indifferent to disappointments in US fundamentals. 

Written by David Rodríguez, Currency Analyst for DailyFX.com

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25 October 2007 17:26 GMT