Dollar Retreats as Fed's Fisher Says GDP May Turn Negative

 |  Includes: ERO, UDN, UUP
by: Grace Cheng

The Euro got a huge punch from the US dollar Tuesday, falling to a six-month low following economic data which showed that Germany, Eurozone’s largest economy, is indeed showing negative growth. The past few weeks of US dollar strength have been met with bewilderment by some people, but today’s data will no doubt convince more that the recent EUR/USD record high exchange rate was, well, too high - for Europe’s own good.

According to today’s report, the German economy contracted in the second quarter for the first time in almost four years, shrinking by 0.5% due to weakness in household spending and construction investment. This was following a 1.3% growth in the first three months of the year. The second blow to the Euro today was the deterioration of the German IFO business confidence which fell to 94.8 in August (97.2 expected) from July’s 97.5. The last time German companies felt so pessimistic about their business conditions was three years ago, and this was the third straight month of confidence drop. Meanwhile, GfK German consumer confidence fell to the lowest level since 2003.

US economic data isn’t bad today: US consumer confidence released today showed a surprise jump to 56.9 (53.0 expected) in August from an unrevised 51.9 in July, signaling that Americans have been feeling slightly better given the recent retreat of gasoline prices.

As for the US housing market, we got the latest S&P/Case-Shiller index showing a smaller decline of 2.3% in home prices this second quarter, compared to the 6.8% drop in the first quarter. The 2Q’s decline was less bad, which makes it an improvement under such recessionary conditions. Another report which was also out today showed that US new home sales rose 2.4% to an annual rate of 515,000 in July from the revised June rate of 503,000, and the number of unsold homes on sale fell 5.2%, the biggest decline since November 1963, to 416,000.

Does this mean that we are seeing a bottom in the housing sector? Dallas Fed’s Fisher doesn’t think so; he said today that housing has not yet bottomed and that the US GDP may become negative in the second half of this year.

EUR/USD fell more than 100 pips to a six-month low of 1.4570 following the release of weaker-than-expected German IFO survey. Its nearest resistance is around 1.4700-20. The Swiss franc also fell to a six-month low against the US dollar, with the USD/CHF reaching an intraday high of 1.1090. USD bulls may gun for stops above 1.1110, and target 1.1170 next.

However, Fisher’s bearish remarks are prompting USD bulls to take some profits now, causing the greenback to nearly erase its gains from earlier Tuesday.

Economic Calendar For Wednesday:

US durables goods 1230 GMT