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US Dollar May Continue Lower through Upcoming Forex Trade

Friday, 16 November 2007 20:02:45 GMT  |  David Rodriguez, Currency Analyst

The US dollar faltered to finish the week’s currency trade, as a strong disappointment in morning Treasury International Capital flows data left the dollar offered through the New York session. Falling investment rates in US financial markets raised fears of further deterioration for the country’s international Balance of Payments and bode poorly for the domestic currency. Subsequent Industrial Production numbers hardly helped the dollar’s cause, and there seems to be little in the way of fundamental data to improve investor sentiment on the US Economy.

Net Treasury International Capital data showed that a net $26.4 billion of investments entered the US through the month of September—significantly below consensus forecasts of $60.0 billion and medium term trends. August numbers were likewise revised lower to a record-low of -$70.6B, as international investors cut back exposure to US corporate lending markets. Outlook remains dim for the future of foreign direct investment in domestic financial markets, and the sharp drop in investor appetite eliminates a key pillar of previous US dollar support. Forex speculators responded in kind, sending the dollar lower immediately following the report.

Subsequent Industrial Production numbers likewise sunk the dollar to further lows, as the month-over-month change fell to a disappointing -0.5 percent. The figure represents the worst performance since January, as a sharp drop in Consumer Goods and Energy dragged the headline index lower.  Consumer goods, which account for approximately 30 percent of all industrial production in the US, fell a whopping 0.7 percent through the period. This hardly speaks well for strength of consumer spending, and we may be seeing early signs that consumption will markedly slow in the months ahead. Other notables on the report included a 0.7 percent drop in Energy production—leaving total Materials production at -.4 percent through the period. 

The Dow Jones Industrial Average saw relatively choppy end-of-week trade but managed to finish 0.4 percent higher to 13,165 at the 4pm close. The marginal improvement in the key risk barometer only sunk the dollar to further lows, but it remains to be seen that these recent gains will be sustained.

US Treasury markets were relatively calm through the close, with the 2-year Note adding 2 basis points in yield to 3.33 percent. The session proved a welcome relief for hard-hit Treasury bond traders, as the past week of volatility has been nothing short of incredible from a historical standpoint. US Federal Reserve Funds Futures contracts were similarly stable through the close, and a marginal improvement in financial markets left the implied yield on the December contract up 1.5 basis points to 4.34 percent. Such a yield tells us that speculators have priced in an 86 percent chance that the Fed will cut rates by 25 basis points at it December meeting. 

Written by David Rodríguez, Currency Analyst for DailyFX.com

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