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World Market Pulse FX Update: Dollar Drive Amid Housing Data And Geithner Remarks

|Includes:ERO, EU, CurrencyShares Australian Dollar Trust ETF (FXA), FXB, FXE, GBB, UDN

The US dollar had its worst month since May 2009 against a basket of currencies. In fact for the last six weeks the US dollar has slid lower relentlessly on speculation that the Federal Reserve would embark on a further stimulus program to liven up the flagging US economy. In fact the US dollar index despite making new 8 month lows actually finished the day higher than when it started after the Fed chairman Bernanke's speech on Friday underlined the inevitability of such a move in the near future. The Dollar index however lost some ground towards the end of the day as doubts remained about the scale and the extent of any easing at next months Fed meeting.  The US dollar did however gain some late support from some comments by US Treasury Secretary Tim Geithner, who stated in Paolo Alto that the US would not seek to devalue the dollar saying, "It is not a viable, feasible strategy and we will not engage in it.”

Low US Industrial Production:
Meanwhile a worse then expected US industrial production figures for September at -0.2% against an expectation of a 0.2% gain, seems to reinforce the case for additional stimulus measures and saw the US dollar slide back from the highs of the day, especially against the euro as 10 year bond yields closed in the single currency’s favor for the first time in 10 months

Improved Home Builder Confidence: The dollar improved across the board following today’s improvement in the housing market survey. All three of the HMI’s components registered gains in October. The index of current sales conditions improved by 3 points to 16, the index for sales expectations for the next 6-months rose 5 points to 23 and the index gauging traffic of prospective buyers rose 2 points to 11. The improved data gave investors an excuse to lay off the buck as it briefly put into question the extent of Fed easing.

Some of the other potential catalysts that can act for a positive Dollar Index are discussed here.

A Case For A Positive US Data Triggering Dollar Index:

Linking Economic Data Release And USD

According to BNP Economic Research, US economists tend to react quickly to data releases. When data comes in weak, expectations are scaled back lower, increasing the chance of data exceeding expectations. Hence, the surprise indicator becomes very erratic. Hence, months of positive data surprises are often followed by a months with negative data surprises. Only, when there were severe growth deteriorations as in autumn 2006, summer 2008 and the May – July period of this year will the surprise indicator run negative readings for several months. US growth expectations have been scaled down suggesting that it will not take a lot to exceed low expectations.

ETFs Investment Options include

Rydex CurrencyShares Euro Currency Trust (NYSEARCA:FXE):  The EUR/USD exchange rate is a foreign exchange spot rate that measures the relative values of two currencies, the euro and the U.S. dollar.

FXE Tracks: Euro Index. Expense Ratio: 0.40%

PowerShares DB USD Index (NYSEARCA:UDN): The Index is a rules-based index composed solely of short USDX futures contracts. The USDX futures contract is designed to replicate the performance of being short the US Dollar against the following currencies: Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc.

Expense Ratio:  0.40%

iPath GBP/USD Exchange Rate ETN (NYSEARCA:GBB): The GBP/USD exchange rate is a foreign exchange spot rate that measures the relative values of two currencies, the British pound and the U.S. dollar.

Expense Ratio:  0.40%

iPath EUR/USD Exchange Rate ETN (NYSEARCA:ERO): The EUR/USD exchange rate is a foreign exchange spot rate that measures the relative values of two currencies, the euro and the U.S. dollar.

Expense Ratio:  0.40%

Disclosure: No Positions