Today’s trading session was relatively quiet for the US dollar when compared to the start of the week as it traded sideways against most of its major counterparts amid a better than expected productivity report. The US dollar held up ahead of the Bank of England and the European Central Bank’s rate decision as it absorbed minor gains against the Euro, and found itself continually appreciating against the Pound Sterling as today’s economic releases amplified the bleak outlook for the UK. The Yen continued its gains from yesterday as risk aversion weighs on carry trades.
The Non-farm Productivity index reflected an improving economy as US employers slashed production hours by the most in five years, with the index unexpectedly climbing to 1.5 percent. The cut in working hours not only helped to boost productivity, but it was also responsible for dampening the rise in Unit Labor Costs for the fourth quarter. The MBA Mortgage Application index also showed an improving outlook for the US economy as it rose for the fifth consecutive week to 3.0% due to lowered borrowing costs. The effect of the huge rate cuts by the Federal Open Market Committee are slowly but surely helping to improve the economy, and has granted some breathing room for the Fed to switch gears and target inflation.
The stock markets continued to struggle as an intraday reversal sent the DJIA lower for the third consecutive day as it shaved off 65.03 points in today’s session, with General and Ford Motors topping the loser list. The DJIA plummeted after Philadelphia Fed’s President, Charles Plosser, criticized the destructive rates cuts by the FOMC will eventually fuel inflation for the US. The broader S&P500 fell 30.82 points after Plosser’s speech, with Yahoo Inc. shares falling as they continue to look for alternatives to Microsoft’s copious $44.6B bid.
US Treasuries welcomed investors as the dragging securities market helped risk adverse investors to soak in gains as yields were pushed higher. A rally in risk free assets sent bond prices falling as the 10-Year yield climbed to 3.60 percent and the 2-Year yield rose to 1.95 percent. For tomorrow, all eyes will be focused on the rate decisions by the Bank of England, who is expected to lower rates by 25 bp, and the European Central Bank, who is expected to keep rates unchanged. As for the US, new data on Pending Home Sales, Chain Store Sales, and Consumer Credit is anticipated to reflect improving conditions for the economy, and may boost the US dollar in tomorrow’s session.
