The US dollar continued lower for the fifth consecutive trading day, but a late wave of profit-taking lifted the Greenback through mid-day New York price action. The Euro fell just 40 points short of all-time trading highs against its North American counterpart, while the British Pound remained similarly elevated near 20-year highs. Markets seemed intent on continue dollar selling pressure, but traders were likewise reluctant to keep positions ahead of the typically illiquid US July 4th holiday weekend. This likely explains why the USD was able to remain relatively unaffected by disappointments in key economic data.

Outlook for the US economy was marginally worse through the morning’s fundamental news, with a domestic Pending Home Sales release showing that activity in the real estate sector neared 6-year lows. Indeed, the headline measure of pending transactions dipped by 3.5 percent through May, following 3.4 and 4.5 percent declines in April and March, respectively. Analysts blamed the poor performance on difficulties in the mortgage market, with firms cutting back on lending to sub-prime borrowers as uncertainty over the broader sector trumps liquidity.

Recent US Factory Orders figures likewise put a damper on the future of domestic growth, as the report showed Capital Goods Expenditures excluding defense and aircraft dropped 2.1 percent through May. Access to inexpensive financing has led to a long term surge in domestic capital investment, boosting productivity and leading to sustainable economic growth. Yet recent gains in yields have left a lasting effect on borrowing costs and threaten to derail such investment-led growth. Continued worries over the US Collaterized Debt Obligation (CDO) market will only exacerbate fears of a sharper drop in borrowing, leaving risk for further fixed capital investment declines.

Domestic equities continued their recent rebound, with broader indices posting fractional gains through a holiday-shortened trading day. Shares benefited from news of potential mergers and acquisitions and a large gain in Apple Corp’s price on the seemingly successful launch of the company’s new iPhone. The firm is said to have sold up to 700,000 units in less than a week of sales, boosting revenues for the consumer electronics conglomerate. Other market movers included Wendy’s International, the US fast food chain, which is said to be the target of a buyout offer from Triarc Corp’s investment company. Speculation of further share buyouts can only continue to boost overall markets, but risks of rising borrowing costs could easily hurt investors’ access to inexpensive financing.

Fixed income markets retraced yesterday’s gains, with domestic yields posting significant rallies through the trading session. The US 10-year bond dropped 7/16 points to 95 and 25/32 - sending the benchmark yield 6 basis points higher to 5.05 percent through the period. Yesterday we wrote that a close below the crucial 5.00 mark would spell further drops in domestic interest rates, but resurgence in selling pressure has shown that yields may remain at elevated levels through the short term. This is bearish for domestic stock markets, but the dollar would surely stand to benefit from strong returns on investment in government debt.

John Kicklighter is a Currency Strategist at FXCM.