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US Dollar to Stabilize on Bounce in Treasury Yields, Pending Home Sales Surprise

Wednesday, 01 August 2007 17:50:34 GMT  |  David Rodriguez, Currency Analyst

The US dollar saw fairly significant declines through late New York session trade, as disappointing economic data completely erased an earlier greenback rally. A morning ADP Employment report showed that the US private sector added the fewest number of jobs in four years through the month of July. This announcement alone was enough to send bond yields lower and start an early dollar retrace. Subsequent ISM Manufacturing numbers did little to boost dollar sentiment, but a simultaneous Pending Home Sales report showed that there remain signs of life in the domestic real estate market. The net effect of the morning data left the US dollar lower, but later signs of stabilization suggest that the currency may retrace past mid-day trade.

The Euro remained nearly flat off of yesterday’s close, as overnight declines reversed through the New York morning. Currency traders exchanged euros for dollars at a rate of $1.3675 through time of writing. The British Pound was similarly unchanged at $2.0310, while the recent volatility in the Japanese Yen subsided. The Asian currency fetched ¥118.64 to the dollar. 

The ADP National Employment report showed that the private sector added a mere 48,000 jobs in July—far below consensus forecasts of 100,000. Such a dismal gain suggests that Friday’s official Non Farm Payrolls report will show a similarly disappointing result, and the US dollar responded in kind. Given a simultaneous slide in bond yields, the greenback shed 30 points against the euro within half an hour of release time. Yet markets arguably tempered their reaction on the ADP data alone. The private firm’s monthly data has proven somewhat inconsistent in predicting monthly Non Farm Payrolls results, leaving some doubts on forecasts for the upcoming Bureau of Labor Statistics economic release.

Later ISM Manufacturing data likewise came below consensus estimates, adding further bearish momentum to US dollar pairs. Domestic manufacturers reported decelerating growth in the broader sector, as the headline Institute of Supply Management number fell from recent yearly highs to 53.8. The slowdown came as the Prices Paid component to its lowest since February, showing continued signs of moderating inflation in the world’s largest economy. Employment growth was similarly constrained at an effectively neutral 50.2 reading. Net implications were subsequently bearish, but a simultaneous Pending Home Sales release moderated the post-event dollar tumble. 

The National Association of Realtors reported that Pending Home Sales surged 5.0 percent through June—the first gain in four months. The unexpectedly bullish report showed signs of life in the domestic real estate market and suggests that conditions may stabilize through the medium term. This helped reverse earlier stock market and bond yield declines—erasing much of the early morning damage. Given that deterioration in the housing market remains one of the top market concerns for the US economy, any signs of life in housing data will likely bolster outlook for the future of economic expansion.

Stock markets continued their recently volatile trade, reversing earlier declines to post modest gains through the afternoon. The Dow Jones Industrial Average was the largest percentage gainer of the three major indices, trading 80 points higher to 13,293. The S&P 500 was up 0.4 percent at 1,461.10, but the tech-heavy NASDAQ Composite was nearly unchanged at 2,550 through the same period. 

Fixed income markets were likewise choppy, as the 10-year Treasury Note erased its earlier advance to enter negative territory. Prices on the benchmark government bond lost a quarter point to 97 and 7/8, while yields added 3 basis points to 4.77 percent.

 

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