Even Strong US Data Fails to Keep Dollar Afloat (page 1 of 2)

US Dollar

Dollar weakness continues to be the predominant theme in the markets as traders shrug off another batch of stronger US economic data. In fact, strong would probably be an understatement.

Durable goods orders in the month of March surged 6.1 percent with orders excluding transportation rising 2.8 percent. This was three times more than expected and along with that, the figures for the month of February were also revised higher from 2.6 percent to 3.4 percent. These figures confirm the strong pickup in GDP growth that the market is expecting for the first quarter.

The current forecasts is for GDP growth to accelerate from 1.7 percent to 4.9 percent. However, durable goods was not the only piece of good news that was released today. New home sales also jumped 13.8 percent, printing the biggest increase in 13 years. This follows yesterday's sharp rise in existing homes sales and at first glance, the report suggests we are still far from a burst in the housing market bubble. However, cautiousness is warranted by housing market bulls because much of the increase can be attributed to price cuts by builders. On average, prices are 7.1 percent lower from February and 3.6 percent lower from a year ago. Meanwhile mortgage rates hit the second highest level since 2002, which prompts us to ask once again, how much longer can this last.

Unlike existing homes where price cuts are more bearable by owners since they are coming off of sharp appreciations in the past, price cuts by builders of new homes are less so. Nonetheless, the strength of these reports cannot be refuted and the fact that the dollar failed to hang on to even a modest rally indicates how deep dollar bearishness has been embedded in the currency markets.

The Treasury's Beige book report was basically neutral. The various districts reported tighter labor markets, improving retail sales, but also slower sales in the real estate sector. They also stressed price pressures and the difficulty firms have in passing costs onto consumers, which means that they have been taking the hit themselves. Given the muted response from these reports, it is even clear that the tone in the market has been set by the G7 and even though moves are getting somewhat overextended, dollar weakness still remains the predominant theme.

Euro

Wednesday marks the fourth consecutive day of Euro strength. It is worth noting that we have not seen a move in the EUR/USD last more than five straight days since November. The latest bout of Euro strength came from broad dollar bearishness, but also hawkish comments from the European Central Bank.

In particular, Gonzalez-Paromo said that the ECB could increase the pace of its rate hikes while Bini-Smaghi added that if the economic recovery strengthens, then the central bank will adjust rates to avoid inflation. This has raised the question in some minds that a May rate hike may not be completely off the table. We remain doubtful however since the ECB is not one to deliver surprises.

Meanwhile economic reports released this morning were mostly positive for the Euro. Industrial orders jumped 2.7 percent in the month of February, bringing the annualized pace of growth to 13.3 percent. Industrial production was flat for the same month, but the upward revision to the January figure offset the neutral report. The annualized pace of growth also increased from 3.0 percent to 3.2 percent.

Finally, German consumer confidence as measured by the GfK report rose to 5.5 for the month of May following an upward revision of the indicator to 5.3 last month.