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US Dollar Loses as Treasury Yields Drop, Carry Trade to Dictate Greenback Direction

Tuesday, 31 July 2007 18:30:20 GMT  |  David Rodriguez, Currency Analyst

The US dollar continued lower for the second consecutive trading day, as largely disappointing economic data offset earlier bids against the Euro and the British Pound. A later stabilization in US Treasury yields and pullback in the Dow Jones Industrial Average likewise did little to boost the greenback. The trade-weighted Dollar Index has lost approximately 0.4 percent off of yesterday’s highs.

The British Pound was one of the largest currency movers on the day, gaining over 130 points to highs of $2.0360 through time of writing. The GBP rally was largely a function of increased risk appetite across asset classes, which likewise explains the Japanese Yen’s 10 point decline to ¥119.18. The Euro added as many as 30 points against the dollar before settling to trade at $1.3692 through the New York afternoon.

Economic data did little to boost the US currency, as Personal Income and Spending fell below consensus forecasts through the month of June. The simultaneous Core Personal Consumption Expenditure (PCE) Deflator likewise came below expectations, indicating that price inflation was slowly moderating through the period. Net implications from the government data only add to sentiment that the US economy will see a deceleration in growth through the medium term. The dip in inflationary pressures may likewise allow the US Federal Reserves to loosen monetary policy through coming months, adding further downward momentum to USD pairs.  

A later US Consumer Confidence report nonetheless moderated dollar-bearish sentiment, as the Conference Board measure unexpectedly rose to its highest in over 6 years. The data suggested that the earlier slowdown in spending may moderate through the coming months. An optimistic consumer clearly bodes well for the future of domestic growth, as personal spending accounts for the vast majority of national gross domestic product. The US dollar slowly rallied in late-morning New York trade before a rebound in carry trade strength. The greenback has grown increasingly sensitive to shifts in broader market sentiment, acting as a target for flights to safety in risky assets. Outlook for the domestic currency will subsequently depend on the overall performance of global equity markets and other similarly speculative asset classes.

Stock markets continued their recently volatile trade, with the Dow Jones Industrial Average seeing early triple-digit gains before a pronounced pullback in later price action. The Dow was up 41 points to 13,400. The higher-risk NASDAQ Composite index remained nearly unchanged at 2,583.86, however, indicating that investors’ propensity to buy high-growth stocks had diminished. This perhaps explained the lackluster gains in the broader S&P 500 index, which inched 4 points higher to 1,478. 

Fixed income markets likewise showed choppy price action, as the 10-year note reversed sharp declines to remain slightly higher through the afternoon. The benchmark Treasury added 3/32 points to 97 and 2/3, sending yields a single basis point off to 4.79 percent.

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