US Dollar Dips on Geithner Comments, Japanese Yen Slips on US Data-Propelled Gains in Risky Assets

Wednesday proved to be an altogether volatile day for the US dollar and Japanese yen, as US economic data proved to be much better than anticipated, which provided a boost to US equities in the morning, but the combination of increased risk appetite, which typically hurts “safe haven” assets, along with comments by US Treasury Secretary Tim Geithner sent the greenback plummeting. During the Q&A session of speech Geithner gave, he said that said he was "quite open" to China’s proposal to move toward greater use of a global currency basket made up of dollars, euros, yen and sterling. “ In the past, the only comments to come from the mouth of a Treasury Secretary in regards to currencies were along the lines of “we believe in a strong dollar policy.” However, the slightest hint that demand for the US dollar may fall in the long run was enough to send the currency reeling.

Taking a look at the economic docket for the day, Durable Goods Orders surprisingly jumped for the first time in seven months at a rate of 3.4 percent in February, which was an especially positive development when you consider that the index had been forecasted to fall 2.5 percent. A breakdown of the report shows that transportation, machinery, computers, and electrical equipment all made positive contributions to the headline result. Furthermore, non-defense capital goods orders excluding aircraft - a gauge of business investment - rose by 6.6 percent. Meanwhile, data from the housing sector was similarly strong, as the Commerce Department reported that new home sales unexpectedly rose 4.7 percent in February to an annualized pace of 337,000, helping to push supply levels down to 12.2 months from 12.9 months. This comes on the tails of Monday’s existing home sales release from the National Association of Realtors (NAR), which also showed a surprise increase, though the only difference was in price. Indeed, median prices for existing homes actually rose during February, but median prices on new homes slipped to $200,900 from $206,800, which is down a whopping 18.1 percent from a year ago. That said, lower values along with improved credit conditions are just what is needed to help plant the seeds for recovery in the housing sector, but with unemployment climbing and the recession dragging on, it may take time for a true revival to come to fruition.

Looking ahead to Thursday, the 08:30 ET final reading of Q4 GDP for the US is forecasted to be revised even lower after the second round of estimates showed the index down 6.2 percent. The latest results may show a sharp 6.6 percent contraction, which would be the worst since Q2 1980. The National Bureau of Economic Research (NBER) has already declared that the US has been in recession since December 2007, but a plunge in GDP in line with expectations will only suggest that the contraction in growth will continue to be worse than previously expected. The Federal Reserve really has no room to make monetary policy more accommodative, so traders should watch for the impact of this report on equities, as a surge in risk aversion may only lead the US dollar higher if flight-to-quality ensues. However, if the data is in line with expectations, the markets may brush off the news as much of this weakness has already been priced in.

British Pound the Weakest of the Majors as UK Gilt Sale Fails

The British pound saw very choppy price action on Wednesday and ultimately ended the day as the weakest of the majors. New from the UK was highly disappointing as the country’s Debt Management Office, which conducts UK Treasury bond auctions, said that there weren’t enough interested buyers for the government’s 1.75 billion pound gilt sale. This is the first time in almost seven years that such an auction has failed, which puts Prime Minister Gordon Brown in a precarious position. Indeed, the UK government wants to try to sell a record 146.4 billion pounds worth of gilts this year and up to 147.9 billion pounds in 2010 so that they can fund the tax cuts and spending efforts meant to dig the UK out of recession. However, with demand seeming to be lackluster, it will become increasingly difficult and more expensive for the government to fund these efforts, which will force them to either scale back their plans or seeking the help of the IMF.

Euro Bounces from Morning Lows - Upside Potential?

EUR/USD spent much of Wednesday trading within a channel formation that has developed over the past week, which may mark a consolidation of the rally in the pair during early March. Since this is looking more and more like a “flag” formation, there is some upside potential for EUR/USD in the near term, with the 200 SMA at 1.3870 serving as a possible target. Meanwhile, the release of European economic data was generally in line with expectations as the IFO index of German business confidence showed broadly weak sentiment on the business climate (down to a new record low of 82.1), current economic conditions (down from 84.3 to a new record low of 82.7), and the outlook for growth (up to 81.6 from the December record low of 76.9).

New Zealand Dollar Could Come Under Pressure on Thursday’s Q4 GDP Release

The New Zealand dollar benefited from increased risk appetite on Wednesday, as the currency ended the day up against the greenback. However, NZD/USD held below key trendline resistance at approximately 0.5735/50, and with upcoming GDP reports anticipated to show that the New Zealand economy contracted for the fourth straight quarter during Q4 at a rate of -1.1 percent, there a good deal of bearish potential for the pair. This is anticipated to be the sharpest decline since Q1 1991, as demand for exports declines, unemployment climbs, and consumer spending falters. As it stand, Credit Suisse overnight index swaps are pricing in a 25bp cut by the Reserve Bank of New Zealand (RBNZ) on April 29, but if New Zealand GDP falls more than expected, speculation of more aggressive rate cuts could rise and weigh on the New Zealand dollar. On the flip side, better than anticipated results could provide at least a brief boost to the currency.

Terri Belkas is a Currency Strategist at FXCM.