Dollars in Demand after Stronger Data

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Investors are buying U.S. dollars today thanks in part to better than expected U.S. data. According to the latest reports, the U.S. economy expanded by 2.5% in the second quarter, up from an initial estimate of 1.7%. Stronger inventory investment, upward revision to exports and downward revision to imports offset a reduction in spending. This data confirms that the U.S. economy gained momentum for the second straight quarter. Jobless claims also edged slightly lower with only 331k Americans filing for unemployment benefits versus 337k the prior week. As claims in general have been extremely low in August, next week’s non-farm payrolls report should show an increase in non-farm payrolls. Fewer firings have not always translated into stronger hiring but the jobless data is consistent with a continued recovery in the labor market. All of this is good news for the Federal Reserve who has a big decision to make on monetary policy next month.

The worst performing currency this morning is the euro. While part of the weakness can be blamed on U.S. data, German unemployment numbers surprised to the downside. For the first time in 3 months, the level of unemployment increased. As previously indicated by the PMI numbers, job growth in the service sector was offset by job losses in manufacturing. Consumer prices also stagnated in August and these 2 reasons could limit the level optimism from the European Central Bank who meets next week. A closer look at the intraday price action of the euro reveals that the sell off in the currency pair started at the London open when European investors drove the U.S. dollar higher against all of the major currencies. There was no news to fuel this specific demand which suggestions European traders were adjusting their positions in response to the ongoing sentiment on Syria.

Meanwhile the broad based rally in global equities and decline in commodity prices indicates that the market’s anxiety around Syria is easing. The Obama Administration is taking its time crafting a response and they will most likely go for limited strikes with UN support. The UN’s endorsement could take time to achieve and as investors wait, their attention could shift to the last unofficial weekend of summer, leading to quiet trading on Friday and Monday.

Kathy Lien
Managing Director

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