Weak U.S. Reports Trigger U.S. Dollar Rally

The U.S. Dollar is mounting a strong comeback after a basket of currencies reached a new 14-month low. 

The U.S. Dollar is mounting a strong comeback after a basket of currencies reached a new 14-month low. Weaker than expected U.S. PPI and housing reports is sending deflationary concerns throughout the markets. These reports have triggered a dramatic turnaround in the Dollar.

The EUR USD tried but failed to reach the psychological 1.50 level before selling pressure came arrived. News that the U.S. economy may be weakening more than expected triggered a shutdown in demand for higher risk assets which led to the selling pressure against the Euro.

The stronger Dollar is driving down the British Pound at the midsession. The GBP USD has been trading higher on fragile ground this week so the break in this market is not a surprise. Traders initially put selling pressure on this market at the start of the week on reports the Bank of England would extend its asset buyback program.

Weakening demand for higher yielding assets is helping to rally the USD JPY. Poor U.S. economic reports are sending out signs of the possible development of a deflationary scenario. This is leading traders back to the safety of the U.S. Dollar.

As expected, the Bank of Canada left interest rates unchanged at .25 and reiterated its call for a possible rate hike during the second quarter 2010. The BoC also said that the rise in the currency offset gains in the economy. This news sent the USD CAD sharply higher as the BoC turned up the heat on the Canadian Dollar with the threat of an intervention.

The AUD USD is trading lower. A combination of a slow down in demand for higher yielding assets and the thought that the market is overpriced is helping to weaken the Aussie. The minutes of the last Reserve Bank of Australia meeting shows no evidence that the RBA is considering a 50 basis point rate hike during November.

The NZD USD is trading weaker on lower demand for higher yielding assets and overbought trading conditions.