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US Dollar Bounces on Dow Jones Tumbles - Can it Hold Gains?

Monday, 05 November 2007 19:15:47 GMT  |  David Rodriguez, Currency Analyst

The US dollar moved marginally higher through early-week currency trading, as a sharp return to risk aversion and a bullish ISM Services result produced a soft bid for the downtrodden currency. Sharp declines in Asian equity markets forced forex speculators to cover overextended carry trade positioning, and the US dollar benefited as a result. Given that the greenback’s shrinking yields have left it sold against major forex counterparts, any pullback in high-yielders will leave the currency bid through short-term trade.

Euro bulls saw the single currency fall sharply against the Japanese Yen, but a more limited dollar bounce left the EURUSD a smaller 60 points lower to $1.4467. The British Pound was among the currencies hardest hit by the brief carry trade unwind, with the Sterling losing as much as 112 points to intraday lows of $2.0781. Short-term greenback strength was not enough to derail the Canadian dollar, however, which set fresh record-highs of C$0.9304 per US$ through earlier trade. The US dollar likewise slipped against the resurgent Japanese currency—shedding 0.50 to 114.36 yen.

Morning US economic data painted a surprisingly optimistic picture of services sector strength, with the ISM Non-Manufacturing index unexpectedly improving through the month of October. Robust demand for export services was the driving force behind the improvement, and the broader New Orders index jumped 2.3 points to 55.7. Other key indices nonetheless fell through the same period, and Employment remained muted with a 0.9 point drop to 51.8. It seems as though external demand for US services will be a key component to watch rolling forward, and a weak dollar is sure to boost non-US appetite for domestic production.

US equity markets nonetheless showed sharp declines through the trading day, as renewed worries over the future of credit market-linked losses forced major sell-offs in key stocks. The Dow Jones Industrial Average lost as many as 146 points through earlier price action, but a later moderation in selling pressure left the Dow 54 points off to 13,540. Financial stocks led the broad indices lower, with the S&P 500 0.5 percent worsened to 1,502. The speculative NASDAQ Composite was the hardest hit among the three majors, dropping 0.6 percent to 2,794. 

US Treasury Bond markets remained tame despite volatility in domestic stock markets. Indeed, the 2-Year Treasury Note yield remained exactly unchanged at 3.67 percent.

Written by David Rodríguez, Currency Analyst for DailyFX.com

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