Dollar Resilience Continues

One of the developments we anticipated that would be an early signal that may be poised for a reversal was in how the market responded to poor US economic data. If it sells off, it meant that the market had not fully taken on board the slowdown.

There was no follow through selling of the greenback after the knee jerk reaction to the disappointing jobs data at the end of last week. And just now the market has shrugged off the disappointing inventory data. The market expected around a 0.4-0.5% rise in June inventories. It came out at 0.1%. Sales fell 0.7%. This combination means that Q2 GDP is likely to be revised lower and that going forward businesses may be cautious about accumulating more inventory.

Of course, the position adjusting ahead of the FOMC meeting is the key driver, so the market may be reluctant to draw hard and fast conclusions from the price action. The $1.3025-50 area looks to offer support for the euro and support for sterling is seen near $1.5680-$1.5700. With London markets winding down, it would not be surprising to see some consolidation now ahead of the FOMC announcement.

The dollar has fared better against the yen than one might have suspected given the drop in equities. However, the JPY86.25 area was like a wall and the greenback has fallen back to into the JPY85.60-80 area.

Separately note that the US-German 2-year spread has moved another 3 bp in the US favor so far today. The spread stands at about 16 bp today, down 8 bp since Friday and is the narrowest since July 22.
Dollar Resilience Continues Dollar Resilience Continues Reviewed by Marc Chandler on August 10, 2010 Rating: 5
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