Carry Versus Growth Will be the US Dollar's Next Battle (page 1 of 2)

US Dollar - The market has been very quiet today but traders should not lose sight of the fact that last week marked a major turning point for the US dollar. After slowly strengthening since the month of August, the uninteresting changes that the Fed made to their FOMC statement last Wednesday led to extremely interesting price action in the currency market. The US dollar saw its longest stretch of weakness since July and for the most part, the weakness continued into the new week.

Although the greenback rebounded against the Euro and Canadian dollar, it extended its sell-off against the rest of the majors. This morning's US data was hardly helpful as weaker growth in spending was offset by stronger growth in income. The problem is that economic growth is at risk while the inflation outlook is unclear. Even though core consumer prices increased strongly in the month September, core PCE and the price index in the third quarter GDP report fell short of expectations.

Even today's annualized PCE deflator increased less than expected despite a revision to last month's core PCE month over month number. The Federal Reserve is on hold at the moment and not likely to move until next year at the earliest. This means that going forward, it will be a matter of carry versus growth. The US' 5.25 percent interest rates are still very attractive, which could bring carry trades back into style, but if US data indicates that growth is taking a major turn for the worse, the market's projections for a rate hike may become too much for the US dollar to handle.

Meanwhile despite today's quiet price action, this is a big week in the currency market with the G7 countries releasing a tremendous amount of data. In the US tomorrow, we are expecting consumer confidence along with the Chicago PMI report. Given the weakness in industrial production, Philly Fed and ISM, the Chicago PMI report is expected to drop and even if it manages to rise, the strength will probably be shrugged off as other data suggests weakness in the manufacturing sector nationwide. The Conference board's consumer confidence reading however is predicted to be strong after last Friday's rise in the UMich consumer confidence survey.

Euro and Swiss Franc - In contrast to its global counterparts, the Euro did not manage to extend its strength against the US dollar. Economic data was decent with the French business survey rising 4 points to 17 and unemployment dropping by 20k, bringing the jobless rate down from 9.0 percent to 8.9 percent. The weakness in the EUR/USD can be mostly attributed to earlier EUR/JPY selling.

The 150 level has proven to be staunch resistance in the pair and traders have been adamant about keeping it below that level. There is a ton of Eurozone economic data due for release tomorrow with German retail sales as the highlight. After stagnant consumer demand in August, a revival is expected for the month of September.

The Eurozone economy is doing well for the most part, which will keep the central bank on track to raise interest rates. There has been no news out of Switzerland. However, for those who listened to the Swiss Finance Minister's comments last week about the Franc needing to strengthen against the Euro, awards were doled out in the form of profits. EUR/CHF fell for three consecutive days which was its longest stretch of weakness since mid September. There is no data due for release from Switzerland until Wednesday.

British Pound - The British pound easily took out the 1.90 level against the US dollar to register gains for the fourth consecutive trading day.