U.S. Economic Data Drives Dollar Higher

Stronger economic data this morning helped drive shorts out of the Dollar and triggered a surge to the upside which put the U.S. Dollar Index in a position to post a six-month high.

Stronger economic data this morning helped drive shorts out of the Dollar and triggered a surge to the upside which put the U.S. Dollar Index in a position to post a six-month high.
Early in today’s trading session, the Dollar was trading lower as appetite for risk drove up demand for higher yielding assets. Trading was once again subdued due to tomorrow’s European Central Bank and Bank of England announcements. Many major players are also trading lighter ahead of the U.S. jobs report on Friday, February 5th.

This morning’s ADP Employment Report showed that fewer jobs were lost during January. This lent credibility to the notion that the economy is improving and that Friday’s Non-Farm Payrolls Report may actually show positive jobs growth. Traders are now feeling more confident about the economy. Some are speculating that Friday’s jobs report may actually show positive growth.

In another report, January’s ISM Non-Manufacturing Index crossed the 50 level indicating that momentum was turning to the upside. Following the release of these reports, traders reversed the course of the Dollar, indicating that investors were shifting their focus away from risk and on improvement in the U.S. economic outlook. Global currency markets sold off as demand dropped for higher yielding currencies. Both reports supported the Dollar because they provide the Fed with more information needed to begin raising interest rates.

The EUR USD reversed course after testing a minor 50% retracement level at 1.4023. Today’s weakness is a pure economic play. The release of upbeat U.S. reports supports calls for a strengthening economy. News that the European Union accepted the proposed budget deficit solution from Greece helped give the Euro an intraday boost, but concerns remain, therefore, the gains were unable to take hold. The recent rise in the Euro was attributed to easing tensions in Greece. Problems still remain in Portugal which could limit the Euros upside potential. On Thursday, the European Central Bank is expected to announce that interest rates will remain steady at 1%.

The GBP USD spiked to the upside last night on the news that U.K. consumer confidence had risen more than expected, but backed down when U.K. services data failed to meet expectations. These stories provided more evidence that the Bank of England will likely leave its quantitative easing program intact or perhaps increase or extend it.

Speculators had been driving this market higher on the notion that the Bank of England members will provide a more hawkish opinion on the economy in tomorrow’s policy statement. Today’s stronger U.S. economic reports put pressure on the British Pound. Traders turned bearish once they realized the U.S. economy was on a faster pace toward recovery.

The USD JPY rallied sharply higher after the release of friendly U.S. economic reports. Improvements in U.S. jobs and non-manufacturing sector encouraged traders to focus more on the recovering U.S. economy rather than the weaker Japanese economy.
The stronger U.S. economy and the weaker Euro helped put pressure on the Swiss Franc, triggering a rally in the USD CHF. Look for talk of intervention by the Swiss National Bank, if the Swiss Franc appreciates too much versus the Euro.

The USD CAD finished sharply higher following a sell-off in commodities, led by weaker gold and crude oil. Falling demand for higher yielding assets also put pressure on U.S. equity markets. The drop in crude and gold could put pressure on the Canadian economy which relies on those to key export markets.

A drop in demand for higher risk assets helped to pressure the NZD USD. A drop in demand for commodities could be a drag on the New Zealand economy. Traders are concerned that an improving U.S. economy signals the Fed is moving closer to hiking rates. This will tighten up the interest rate differential between the two countries, taking away some of the incentive to invest in New Zealand financial markets.

The AUD USD weakened after stronger U.S. economic reports drove traders into the Dollar. Tuesday’s low is still holding, but Wednesday’s friendly economic news moves the Fed closer to raising interest rates. This is pressuring the Aussie since a hike in U.S. rates will tighten the interest rate differential between the two countries.