Dollar sees largest one day slide in four years (page 1 of 2)

US Dollar

On the first day of official trading in 2006, the dollar has weakened significantly against the majors, with the dollar index seeing its largest one day decline since September 11, 2001. Given that a new year long uptrend began on the first trading day of last year, we wonder if today's breakout move would be indicative of a new trend that may be emerging this year.

So far, the cards are stacking higher against the dollar, but with a busy week ahead and Greenspan bowing out at the end of this month, it remains to be seen if the current downside momentum can be sustained.

Today, the combination of weaker economic data, dovish FOMC minutes and higher oil prices all weighed on the greenback. The national ISM manufacturing activity index slipped to 54.2 from 58.1.

The market was only expecting a moderate retracement to 57.4, but broad based weakness dragged the overall index lower, raising concerns about whether the sector is growing fast enough to spur job growth. Construction spending hit a new record high in the month of November, but with only a 0.2 percent rise, the growth was far below the market's 0.7 percent forecast and slower than the previous month's 0.8 percent growth.

Oil prices are up close to $2 following the Russian - Ukraine gas dispute that disrupted flow to most of Western Europe. Although gas supplies to Europe have since returned to normal, this is a far more deep seeded conflict that could resurface since Russia is adamant about increasing prices to the Ukraine while the Ukraine acts as Russia's doorway to Europe.

90 percent of Russia's gas exports pass through Ukraine, supplying 40 percent of the EU's oil. At present, it seems that Russia is only siphoning out enough oil to meet their customers' needs, leaving no spare supply for the Ukraine.

For the time being, the Ukraine has enough supplies to last for a few weeks which will keep oil speculators at bay and this issue on the back burner, but if they exhaust that supply and resort to extracting oil from the pipeline before negotiations are completed, Russia would accuse them of stealing the oil and we could see another shock to oil markets once again.

In the meantime, the bigger focus continues to be the Fed. The FOMC minutes released today reflected the varying views on the degree of future rate hikes.

Additional increases "probably would not be large" and "members thought that the policy outlook was becoming considerably less certain." With the yield curve inverting last week and now near flat, the Jan 31 rate hike could be the last one before we see a pause. If so, then today's move could very well be indicative of a new trend this year.

Euro

The Euro is starting 2006 with a bang. Not only is it benefiting from broad dollar weakness, but it is also basking in improvements to its own data.

Manufacturing activity in the Eurozone as measured by the PMI survey increased from 52.8 to 53.6 in the month of December with the first factory job growth in 4 years. The Italian retail confidence index increased to 105 from 104 while French GDP was confirmed at 0.7 percent for the third quarter.

One of the biggest surprises today however was the sharp drop in German unemployment last month. Expected to only dip by 8k, the index fell for the third consecutive month thanks to mild weather. Dropping by 110k, this is the biggest one month improvement since the German reunification in October 1990.