Dollar Moves Limited as Market Wonders Whether Strong Confidence and Existing Home Sales Can be Repeated (page 1 of 2)

US Dollar

Earlier gains in the US dollar were reversed as the market questioned the sustainability of the stronger economic reports. Soaring oil prices seemed to have little impact on the sentiment of consumers as their confidence hit 4 year highs. The market was expecting confidence to dip from 107.2 to 106.2, but instead it jumped from an upwardly revised 107.5 to 109.6 for the month of April.

It seems that the comfort of a booming labor market is offsetting the strain that consumers may be feeling at the pump, but if pump prices continue to rise, it is only a matter of time that sentiment also turns sour. Taking a look at the previous rallies that we have seen in oil over the past year, such as the June to August move and then the December to January move, it wasn't until we hit a peak in oil that consumer confidence began to topple. In both instances confidence saw big jumps before paring back significantly.

Another piece data that came in stronger than expected but its sustainability remained questionable was the existing home sales report for the month of March. Existing home sales increased from 6.9 million to 6.92 million. Although the actual increase was nominal, it was substantial compared to the market's forecast for a dip to 6.66 million. The worry is that existing home sales tends to be a lagging indicator because it reflects sales that were completed in March.

This means that the actual purchase was probably made a month or two before that. Even though tomorrow's new home sales report is for a smaller sector of the overall market, it tends to be seen as a more reliable reflection of how well the housing market is currently doing because the sales are recorded in the index as soon as the initial contract is signed. There was a huge drop in new home sales reported last month which suggests that a rebound is not out of question.

However, if the rebound comes in far higher than the current forecast, then the arguments for a stabilizing real estate market may be more accurate. Durable goods are also on tap tomorrow along with the Beige Book report. Market expectations suggest that both could to be bearish for the dollar. Against some currencies, we have seen an extension of dollar weakness while for others, today will probably prove to be nothing more than a mere retracement.

Euro

The Euro is stronger today thanks to mostly positive economic data. To the surprise of the market, German business confidence shot to a 15 year high in the month of April. This is also the index's fifth consecutive monthly rise. Originally expected to dip, the index instead rose from 105.4 to 105.9.

Increases were seen in both the current assessment and expectation components of the report, reflecting the economic recovery that is occurring in the Eurozone's largest economy. Although some skeptics say this may be the peak in the IFO report, it nevertheless confirms the need for the central bank to remain hawkish. This is especially true after the big jump in German consumer prices in the month of April. The annualized rate of CPI growth increased from 1.8 percent to 2.0 percent with the harmonized rate rising from 1.9 percent to 2.3 percent.

This brings the CPI back to levels that should raise concerns at the European Central Bank. Last night's comments from ECB President Trichet was bullish on growth but he downplayed a May rate hike again by saying that the ECB needs to remain "extremely cautious" given the "potential dangers" that high oil and commodity prices can unleash on the global economy.