US Dollar Recovers on Improving Sentiment, Can the Greenback Hold on to Gains?

Written by David Rodriguez, Currency Analyst

The US dollar showed signs of life through end-of-week trade, as the greenback shrugged off mediocre Advance Retail Sales data to rally on improved consumer confidence figures. A subsequent jump in Treasury bond yields likewise improved the currency’s interest rate differential against major trading counterparts, leaving scope for a continued short term bounce.

The euro pulled back from yesterday’s record-highs, dropping $0.0030 to trade at $1.3854 on the New York afternoon. This paled in comparison to British Pound tumbles, as the Sterling was the hardest-hit by news of UK banking troubles. The GBPUSD shed a whopping 170 points to weekly lows of $2.0080. The Japanese Yen likewise rallied on the overnight banking news, but later dollar strength left the greenback up ¥0.20 to ¥115.27.

A busy morning of economic data was initially a mild disappointment for outlook on domestic growth, with the critical Advance Retail Sales report coming in below consensus forecasts through the month of August. The US Department of Commerce reported that spending growth excluding automobiles actually fell 0.4 percent through the period—far worse than median analyst estimates of a 0.2 percent improvement. US market interest rates immediately tumbled on the news, with the greenback responding in kind. Yet a closer look at the underlying breakdown showed that much of these declines came on a 2.4 percent tumble in gasoline sales. Excluding gasoline, Advance Retail Sales actually gained an impressive 0.6 percent through the period. Though year-over-year growth continues to slow, early signs show that consumers remain resilient despite highly publicized real estate and lending problems.

A later University of Michigan Consumer Confidence report likewise tempered pessimism on the world’s largest economy, with statisticians reporting a modest improvement in sentiment through the first two weeks of September. The headline index was hardly impressive at 83.8 versus the 83.4 print seen in August, but such data reinforces the view that consumers remain thus far unaffected by credit and real estate market troubles. Consumer confidence numbers leaves scope for robust consumer spending through the medium term, which would undoubtedly boost the broader economy in the face of a housing recession.

Domestic stock markets took their cue from the University of Michigan data; the Dow Jones Industrial Average recovered much of its earlier declines through subsequent price action. The index remained 12 points below yesterday’s close of 13,413, but signs of stabilization may make for a relatively uneventful end-of-week session. The S&P 500 was likewise lower, shedding 3 points to 1,481. At the same time, the NASDAQ Composite eased a similar 0.2 percent to 2,597.

A sharp gain in short term Government Treasury yields highlighted decreased market jitters, with the 2-year Note adding 6 basis points to 4.08 percent. Longer-dated bonds remained tame, however, with the 10-year Note adding a mere 2 basis points to 4.49 percent.

Written by David Rodriguez, Currency Analyst for DailyFX

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