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US Dollar Could Be Dragged Lower On Rising Unemployment

US Dollar Could Be Dragged Lower On Rising Unemployment

2010-07-30 23:05:00
John Rivera, Currency Analyst
TOF730usd_body_TOF730a.gif, US Dollar Could Be Dragged Lower On Rising Unemployment

US Dollar Could Be Dragged Lower On Rising Unemployment

Fundamental Outlook for US Dollar: Neutral

The U.S. dollar ended lower for an eighth straight week as concerns over domestic growth and firm risk appetite weighed. Strong corporate earnings and relief that the European bank stress tests were behind us helped push equities higher. Strong housing data also helped spur optimism with new home sales jumping 23.6% but a 1.0% decline in durable goods orders reignited growth concerns for the world’s largest economy. The second quarter GDP reading falling to 2.4% from a revised 3.7% the period prior also added to the dimming outlook for growth. However, the upward revision for the first three months of the year combined with upside surprises in the Chicago PMI and the final reading of the University of Michigan consumer confidence reading helped reverse sentiment but the ensuing risk appetite would weigh on the greenback.

First quarter GDP saw a one percent improvement from its final reading led by a surge in gross private investment from 14.7% to 29.1% as companies increased their purchases of equipment and software. The trend continued in the second quarter with another 28.8% increase helping to offset the slower pace of personal consumption. The improvement in business spending could be a prelude to future hiring, easing concerns over the dearth of consumer spending. However, The Fed's latest beige book report of economic conditions showed improvement in most of its 12 regional districts, but with only modest advances in retail sales and weak numbers in housing and construction. The uneven recovery is expected to keep the Fed on old throughout the remainder of the year, but are they sending the right message. Committee member Bullard expressed concerns that the pledge could end up stalling the economy and leading to deflation.

Monday’s release of the ISM manufacturing index will give a more complete picture of the sector and if early forecasts are any indication then we could see dollar support return on risk aversion. Economists are expecting a decline to 54.0 from 56.2 which should dim the growth outlook and perpetuate the current low yield environment. The main event risk for the week will be Friday’s Non-farm payroll report which is expected to show the economy lost another 60,000 jobs with unemployment rising to 9.6%. Disappointing fundamental data could weigh in the reserve currency unless we see a broader flight to safety lend support. -JR

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