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The dollar turned in a mixed performance on Thursday, as volatility presided over Wall Street, exacerbated by choppy trading that threw stocks alternately between the red and the green. The Dow plunged below the crucial 8000 level during midday trading, but managed to reign its losses during the last two hours of trading to close down 5 pts at 8186.
The stock market continues to display a short-term disconnect from economic fundamentals today while the dollar in turn exercised some divergence from equity movements. Even with the unexpected plummet of 3.8% in US June durable goods orders and 11.7% fall in existing home sales, the Dow climbed upward during the morning session. Excluding the 18.5% gain in orders for defense goods, aggregate orders would have slid by 4.8%. On a positive note, initial jobless claims fell sharply last week to their lowest level in 17 months to 362K vs the previous 379K.
Germany is joining ranks with Italy and Belgium in its gloomy economic conditions. The economic think tank Ifo's assessment of business sentiments for July fell below expectations at 89.9, a dip from June's 91.3. The Bundesbank then contributed to the pessimism with a lower revised May industrial output index of 108.6 vs the previous figure of 109.2. Europe's largest economy has been seeing sluggish growth, which will weigh down the whole Eurozone. Although inflation has stayed close to the ECB's 2% target, the rising euro could further undermine economic recovery since a stronger euro will damage Eurozone exports.
The euro remained sickly today, but managed to propel itself to 1.0027 after struggling at the parity level for hours. As U.S. equity losses deepened in the afternoon, the euro gathered enough momentum to hit a session high of 1.0044. Immediate support is back at parity, followed by further support viewed at 99.50 and 99.25. In the event of a euro rally, 1.005 will exert interim selling pressure. A move above 1.0080 would put the upside back on track, targeting the 31-month high of 1.0210.
USDJPY is heading towards the 116.15 support. A firmer base is seen at 115.50, the 17-month low and considered a point of tolerance by BoJ officials. Resistance eyed at 117.10, 117.50, and the week's 117.73 high.
Buoyed by encouraging earnings reports, Britain's FTSE 100 soared by 5% on Thursday, its highest percentage gain in 10 years. Sterling is trading around 1.5829, bringing the 26-month high of 1.5850 into sight. If the sterling rallies beyond this key resistance, the currency could target 1.5950-60, the 62% retracement of the decline from 1.7357 (Oct 1998) to 1.3680 (June 2001). Support starts at 1.57, followed by a foundation point at 1.5580, the 50% retracement of the 1.5143 (July 5) to 1.5850 (July 18) rally.
After dragging the euro to September 2001 lows on Wednesday, Swiss franc also applied downward pressure on the dollar today to a session low of 1.4411. Interim support provided at 1.4390, followed by a crucial base at 1.4357, the 40-month low. Resistance eyed at 1.4595, 1.4610-15 and 1.4780 (week's high).
The dollar's delinquent behavior against the stock market could be traced to several sources. When the stock market suffered deep declines earlier this week, many funds managers were compelled to liquidate profitable currency positions and repatriate assets to cover their equity losses. Another booster for the dollar came from the stampede to purchase U.S. Treasury bills, since liquidity has become an important consideration in this period of volatility and risk.
President Bush and Secretary of the Treasury both attempted to restore some confidence in the U.S. economy and stock market, but the markets ignored their assurances of strong fundamentals in the economy. Recent polls have shown a dip in Bush's approval ratings, as his close ties to corporations have tainted his post-September 11th popularity. The House approved the Corporate Reform Bill today, which officials hope will help assuage investor fears.
U.S. markets will be focusing on the University of Michigan's final assessment of consumer sentiments for July, which had precipitated a sizable sell-off when the preliminary number came in much lower than expected. The prediction for the final figure is 87.7, showing a slump in sentiments from last month's 92.4. With the volatility in equity markets and the prolonged saga of corporate troubles, consumers are feeling more pessimistic. From the U.K., Q2 preliminary GDP will be announced, which according to consensus forecasts should indicate a 1.0% q/q rise and a 1.6% y/y rise growth, a slight improvement from the previous periods. The Eurozone will be releasing some trade data, namely the Q1 Balance of Payments and May ECB current account.