eur news

US Dollar Tumbles on Carry Trade Bounce, but Markets May Reverse Without Warning

Wednesday, 29 August 2007 18:18:24 GMT  |  David Rodriguez, Currency Analyst

The US dollar tumbled on the day, as a sharp rebound in the carry trade and the Dow led the greenback lower against high-yielding counterparts. A virtually empty economic calendar left forex markets to the will of broader risk sentiment, which saw significant improvements on a reversal in global equity markets. Yet traders seemingly remain on the defensive with late moderation in Dow gains.

The Euro rallied against its American counterpart, adding $.0060 to $1.3670. The British Pound similarly benefited from stock market rallies, improving $.0170 to $2.0171. Meanwhile, the Japanese Yen was the biggest loser on the day; the weak US dollar rallied an impressive ¥1.15 to ¥115.39.

Markets remained volatile despite limited event risk, with the Dow Jones Industrial Average the focus of short term trade. A strong open eased market jitters and allowed leveraged speculators to re-enter carry trade positions. Yet a soft moderation in gains through the afternoon threatens to derail earlier rallies. Traders remain on the defensive after yesterday’s heady 2+ percent losses in the Dow, with any signs of trouble to likely catalyze similar moves without warning.  

Such a dynamic likely explains much of yesterday’s US stock market decline. Currencies and interest rates remained largely unaffected by yesterday’s Federal Open Market Committee text, but skittish investors instantly dumped stocks on an effectively unsurprising statement from the US central bank. Implied yields on Fed Funds futures contracts still show overwhelming expectations of a pending interest rate cut from the central bank through its September meeting. Yet stock speculators remained unconvinced that such monetary policy was forthcoming. This divergence in sentiment across asset classes is somewhat rare, and arguably highlights the underlying fear that stock markets will continue to drop on broader market risk aversion. We will continue to assess risk sentiment as it relates to currency markets, but a comparatively empty economic calendar leaves strong currency volatility unlikely ahead of next week’s key economic data.

The Dow Jones Industrial Average remained choppy through late afternoon trade, but the closely-watched index nonetheless rose 1.0 percent to 13,171. This is less than half of yesterday’s declines and leaves short term bearish trends intact on US stocks. The S&P 500 was similarly 16 points higher to 1,448, while the NASDAQ Composite added 1.3 percent to 2,532. 

Risk aversion continued as the theme in fixed income markets, with key benchmark yields falling further from previous heights. Flight to safety pushed the 2-year yield 5 basis points lower to 4.12 percent, while the 10-year Note lost 3 basis points to 4.54 percent.

Written by David Rodriguez, Currency Analyst for DailyFX.com 

Resources

• free demo account
• forex courses
• open an account
• forex stream
• free webinars