Start of the Week Revives Dollar's Safe Haven Theme

A quiet start of the week with virtually no economic data on the G-3 calendar, saw the dollar regain some of its luster as traders considered the possibility of one final Fed rate hike in August and the unrelenting fighting on Lebanon revived safe haven demand for the greenback. Despite the fact that over the weekend Israeli leaders entertained the idea of an EU- led multinational force to police the Lebanon border, diplomatic efforts to diffuse the conflict proceeded very slowly. In the meantime carnage continued as rockets rained on Northern Israel while Israeli air force bombed Hezbollah targets in Lebanon. The lack of diplomatic progress sent traders back to the dollar as the greenback's safe haven appeal overshadowed any concerns over the possible end of monetary tightening by the Fed.

However, the snapback in the greenback may well be temporary. Tonight's reflex rally fueled by the stop covering action of euro bulls who were late to the party, may not have much additional momentum if US economic data this week shows weakness. Existing Home Sales due tomorrow are expected to decline from last months 6.67M run rate. Should they drop even further than expected - and there is substantial anecdotal evidence that the real estate market is beginning to crater especially on the coasts - the fears of a significant slowdown in US economy could quickly return to the market driving capital flows away from the dollar as quickly as they poured in tonight. In fact with Housing, Durable Goods and GDP all on deck this week, "data dependency" may be the true trading theme for the week, assuming the geo-political situation in the Middle east does not worsen.

In economic news, Industrial New Orders surged higher, jumping 14.2% on a year over year basis versus 9.0% projected indicating that the region's recovery remains on pace supporting the euro bullish view that the ECB monetary policy will tighten further in the final calendar quarter of the year. In UK however, the CBI retail index dropped to 7 in August from a reading of 9 in July as the frantic spending at the start of the summer buoyed by the World Cup moderated somewhat.