A dismal US Advance Retail Sales report sunk the US dollar near fresh all-time lows against the euro, but a late Dow Jones Industrial Average tumble allowed the dollar to regain ground against the single currency through later forex trading. Indeed, Advance Retail Sales fell significantly below consensus forecasts through the critical December holiday spending period—making 2007 the worst year for Retail Sales since 2003. The disappointing report on domestic consumer spending confirmed traders’ worst fears and the US dollar sold off accordingly. The euro subsequently fell just short of all-time highs at $1.4925, but poor continuation doomed the currency to a swift reversal on a later Dow sell-off. The risk-sensitive single currency may be hard-pressed to forge fresh heights against the US dollar against sharp drops in the Dow and other major stock markets, but the dollar may likewise find it difficult to force a substantive rebound in the face of fast-falling interest rate differentials against major forex counterparts.
US Advance Retail Sales saw their worst December performance in four years, dimming outlook for domestic consumer spending and increasing the odds of a recession in the broader economy. It appears that ongoing housing market trouble doomed consumption to further contractions after a strongly positive result through November, and forecasts for domestic expansion adjusted accordingly. A simultaneous Producer Price Index report showed that prices rose less than expected through the same period, and traders sent domestic bond and money market yields lower in anticipation of further Federal Reserve interest rate cuts.
Do you think that the Federal Reserve will cut by 25, 50, or 0 basis points on January 31? Have your say on the DailyFX Forex forum.
Federal Funds Rate futures continue to show an approximate 50 percent chance that the Fed will cut rates by a whopping 75 basis points through the month of January. As we continue to argue at DailyFX, such speculation is largely unfounded as a 0.75 percent rate cut would send a clear signal of panic to financial markets and the broader economy. Yet such rate cut forecasts will continue to weigh on the US dollar and may prevent any worthwhile rebounds through short-term currency trading.
Written by David Rodríguez, Currency Analyst
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