Dollar Turns Sharply Lower

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The U.S. dollar is trading sharply lower this morning in what is turning out to be a volatile day for currencies and equities. Despite the lack of U.S. economic data, USD/JPY and USD/CHF are down more than 1%. There’s no specific explanation for this sell-off outside of profit taking which we are also seeing in European equities. The FTSE and DAX have both fallen over 1.5%, which is a big move for both indices. As a result, U.S. equity futures are also pointing to a lower open.

What is confusing for many traders is why the EUR, GBP and other high beta currencies are performing so well when risk appetite is deteriorating. The answer is simple. Investors loaded up on long dollar positions (particularly against the Yen) as stocks hit new highs and the unwind involves cutting that exposure. Some people are also saying that stocks are selling off because investors are waking up to the negative impact of rising U.S. yields. This may be true but higher yields should be positive for the dollar or stem the currency’s slide in periods of risk aversion. There was one piece of U.S. data release this morning and that was the International Council of Shopping Center’s weekly chain store sales report which said spending dropped 0.9% in the week of May 25th after rising 0.2% the prior week. The lack of big moves in the Nikkei and JGB tell us that the sell-off in USD/JPY is driven largely by the dollar and not the Yen.

While the EUR is performing very well today, the OECD called on the European Central Bank to cut their deposit rate and consider Quantitative Easing. They believe that the central bank’s OMT program has achieved a lot but more needs to be done. The agency cut their global growth forecasts to 1.2% this year from a prior forecast of 1.4%. Their concern centers on the high level of unemployment in Europe and the negative impact of continued fiscal reform. As such, they expect the Eurozone economy to contract by 0.6% this year and expand by 1.1% in 2014. In contrast, U.S. GDP growth is expected to increase 1.9% in 2013 and 2.8% next year. Japanese growth on the other hand is expected to hit 1.6% this year but slow to 1.4% in 2014. As for the world’s second largest economy, they now estimate Chinese 2013 growth to reach 7.8%, a significant revision from their prior estimate of 8.5%.

FOMC voter Rosengren is speaking this afternoon so keep an eye on the headlines and of course the performance of U.S. equities which should play a major role in how the dollar trades today. For USD/JPY 100.65 is support and for the EUR/USD, 1.30 is resistance.

Kathy Lien
Managing Director

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