Friday was another unremarkable day for underlying risk appetite trends; and yet, the dollar was once again leading way for volatility with yet another stark plunge. The trade-weighted index fell another 0.6 percent to a fresh eight-month low. And, to ensure that we don’t get lost in the day to day changes or even short-term term volatility, we should put the currency’s performance into perspective. In the past three weeks (15 active trading days), the currency posted a lower close on 10 of the sessions. In this same period, we the Dollar Index has dropped 5.6 percent. What’s more, the series of weekly declines represents the most aggressive tumble since March of last year (though the consistency of this recent bear wave is still well short of the declines between June and early August. What does all of this tell us about the benchmark currency? Losses are certainly exaggerated over the short-term; but from a purely speculative position, the bear wave can subsist until it unwinds all of the November to June gains and beyond. That is unless fundamentals change the currency’s course.
For event risk Friday, there were both scheduled and unscheduled developments to digest. Looking to the docket first, market participants and officials were focused on two particular indicators: the ISM manufacturing number for September as well as the personal income/spending data for August. It was an interesting mix to take in for a dollar that is torn between its safe haven role and fear of an expansionary turn from the Federal Reserve. The factory activity report was a particular disappointment (as was to be expected after the poor showings at the regional level). The headline sector reading dropped to a 10-month low 54.4, while orders and production components slumped to levels last seen in June of last year. This is a considerable blow to the recovery effort because manufacturing has been one of the bright spots in an otherwise drab recovery. That being said, equities wouldn’t slip too far on the news; and therefore the greenback would draw the benefit of risk aversion flows. On the other hand, this would still factor into the ongoing Fed stimulus debate as traders see it as yet another piece of evidence in the ‘near-term increase’ column. But, what about the positive showings for income and spending? Income rose at the fastest pace this year (0.5 percent) and spending would hold off from contracting (at 0.4 percent) for an 11 month. Well, economists say income was bolstered by the extension of jobless benefits; and consumption is still severely restrained by confidence and unemployment. This hardly holds the same influence as the factory report. And, just in case there was confusion as to how the dollar would respond for the day, Fed member Dudley noted in prepared notes that he foresaw a need to expand stimulus going forward.
Next week, the debate over whether the central bank will increase its purchasing program or not will keep the reins. In fact, it will likely intensify. Catering directly to the heavy speculative debate, we have a slew of scheduled Fed speeches that includes remarks from Chairman Bernanke, Fisher, Hoenig and Tarullo. If that isn’t enough to get the boat rocking, we have the September nonfarm payrolls (NFPs) report due on Friday. Though its influence has fluctuated in recent months, the scrutiny on growth as a gauge for stimulus will likely leverage its impact.
Read more at: Forex @ DailyFX - Dollar the Worst Performer into the Weekend as Risk Perks Up but Fails to Curb Stimulus Fears http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/daily_fundamentals/2010/10/02/Dollar_the_Worst_Performer_into_the_Weekend.html#ixzz11Dsf0JVZ
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