Dollar slides as economic growth evaporates

An earlier rally for the dollar came to a crashing pause after a dire reading of second quarter growth although an ugly downwards revision to first quarter growth was the real sentiment killer. The dollar had been surprisingly firm even after a political impasse was punctuated by a further pause as Republican leaders failed to rouse sufficient support to put a vote to the test. While uncertainty mounts for the dollar ahead of a Tuesday deadline, traders are more convinced that the debt-ceiling issue will be resolved at that time to at least some degree. There is, however, no such similar date for the euro beyond which dealers can express confidence. Today the euro is once again on a losing streak as investors check over their shoulders to see little more than smoke and mirrors resulting from the latest Brussels meeting.

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U.S. Dollar – A debt-ceiling limited to $14.3 trillion must be raised so that the U.S. government can service its debt obligations. Heading into the deadline investors are concerned at the prospect of a debt-default and a consequent downgrade. On Wednesday the towering budget deficit will still be there, but we all know deep down inside that politicians will have agreed on a sustainable means by which to pay its way. Turning sentiment on its head on Friday was a revision to first-quarter GDP from a healthy pace of 1.9% to just 0.4%. Second-quarter growth had been expected to slow a smidgeon to an annualized 1.8% pace, but in the event came in at 1.3%. So while the pace did expand there is no silver lining to take away from the data given the admission that the economy was practically dead in the water earlier. The dollar index traded to an earlier high at 74.50 but since the jaw-dropping GDP number came along the index has slumped into reverse at 74.11.

Euro – The euro is fast recovering in light of the latest batch of American data. Earlier the unit sank to $1.4231 despite a surge in German retail sales during June and despite an improvement in Eurozone consumer prices for July. Admittedly the unexpected dip to 2.5% in costs faced by shoppers relieves further pressure on the ECB to consider a third round of interest rate increases. Moody’s said it was putting Spain’s Aa2-rating under review pending a possible downgrade as the nation’s regional governments struggle to control wayward budget deficits. The warning sent shivers across the Eurozone as investors again realized that little has been strengthened other than the vocabulary buttressing the stability pact. The distraction of the U.S. growth report threw the euro a bone and hoisted it back to beyond breakeven at $1.4363.

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