US Dollar Ends Day Down as Consumer Confidence Falls to Worst Level Since at Least 1967

The US dollar ended the day down against its major counterparts as the Conference Board's consumer confidence survey reflected its worst readings since record-keeping began in 1967. Indeed, the index plunged to 38.0 in December from 47.7, with a breakdown of the survey showing a gloomy picture of the US economy. Consumers judged that business conditions had worsened, and that employment had been either less plentiful or just plan hard to get. This data suggests that consumption will weaken further in coming months, and also that the January 9 employment reports are bound to be disappointing. Adding to this sentiment, the International Council of Shopping Centers (ICSC) said that sales fell 1.8 percent in the week ending December 27 from a year earlier while sales fell 1.5 percent from the week prior. Furthermore, the group said that they expect November and December sales to fall from the first time since ICSC began tracking holiday sales in 1969 at a rate of -1.5 percent to -2 percent. Nevertheless, the direct impact of this data on the US dollar has generally been limited as the Federal Reserve has already brought interest rates to record lows, leaving the central bank with little room for maneuver.

Looking ahead through the end of the week, Wednesday’s initial and continuing jobless claims are likely to hold near their highest levels since late-1982, signaling that the unemployment rate is steadily climbing higher. On Friday, the Institute for Supply Management’s (ISM) index of manufacturing conditions during December may fall to the lowest levels since 1982, while the record low of 29.4 reached in May 1980 looming close below. The latter report is likely to have greater implications for the greenback, but only if liquidity picks up enough following Thursday’s market closures for the New Year’s holiday.

Euro Maintains Wide Ranges as Euro-zone Data Suggest ECB Will Cut Rates on January 15

The euro traded within a 200 point range versus the US dollar on Tuesday, ending the day up 1 percent from yesterday despite a slow decline throughout the US trading session. Meanwhile, the euro touched a fresh record high against the British pound for the third day in a row, adding to speculation that the currencies will reach parity within the next few weeks. The moves came despite generally disappointing European data, as the Purchasing Managers’ Index (PMI) for the Euro-zone retail sector edged slightly higher, but still remained below 50 - signaling a contraction in business activity - for the seventh straight month. Meanwhile, M3 money supply for the region slowed to a 7.8 percent annual pace in November, which was the lowest since January 2006, signaling that inflation pressures are cooling as loans to the private sector slowed to 7.1 percent from 7.8 percent, highlighting the extent of the credit crunch. Overall, the data suggests that the European Central Bank will indeed cut rates by 50 basis points or more when they meet on January 15, and this sentiment could drive the euro back down toward yesterday’s low of 1.3916.

British Pound Reaches New Record Low (Again) vs. Euro on Bleak UK Economic, Interest Rate Outlook

The British pound remains exceptionally weak as the currency reach new record lows against the euro and consolidated above 1.44 versus the US dollar. Conditions in the UK remain dismal, as evidenced by the release of disappointing UK GDP revisions last week, which signaled that the economy actually contracted 0.6 percent during Q3 compared to initial estimates of a 0.5 percent contraction. The GDP figures confirmed that the UK fell into recession for the first time since 1990-1991 as a result of the sharpest drop in consumer spending since 1995 and a decline in investment as the financial crisis took its toll. In a similar vein, the Bank of England’s measure of housing equity withdrawals fell for the second straight quarter during Q3 by 5.7 billion pounds, adding to indications that credit is not readily available nor wanted, which leaves consumption growth likely to fade further. The BOE has already cut rates to 2.00 percent, the lowest since 1951, but this data only adds to speculation that they will reduce the Bank Rate by another 50bps in January.

Japanese Yen Ends Monday Mixed, GBP/JPY Hits Fresh 13-Year Lows

The Japanese yen ended Tuesday mixed across the majors, as the currency fell versus the euro and Aussie but gained against the US dollar and British pound. This price action marked more of a consolidation in the Japanese yen crosses and less of a clear directional move. Nevertheless, with GBP/JPY continuing to trade near 13-year lows, the resumption of the yen’s bull trend may add to lingering concerns that Japan will attempt to intervene in the currency markets at some point. If there is a good time for the country to step in to physically drive the currency down, this may be it given the lower volumes we’re seeing in the markets due to the holidays, but if the Japanese yen continues to ease back against most of the major currencies, such action may be unnecessary.

Terri Belkas is a Currency Strategist at FXCM.