Anemic European growth and concerned central bankers facing a void of policy options ahead of them helped shift sentiment in to reverse gear on Tuesday. Further evidence of a weakening U.S. economy once again cast a light on bullish investors proving them to be the contrarians.
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U.S. Dollar – Economic weakness resonated within today’s housing market data on a day when European investors expressed surprise in just how weak their own economy was during the second quarter. U.S. housing starts during July ran at a 604,000 pace, which is admittedly 4,000 above forecast, but represents a 1.5% drop from a downwardly revised June reading of 613,000 when optimists claimed the housing recovery might be underway. Prospects for future activity were dulled by a fall in building permits from an annual pace of 617,000 to 597,000. Overall the year isn’t going to deliver a materially better year than the record low for activity in 2009 and with lenders still picky over who should get a mortgage and for borrowers unable to find a 20% down-payment the horizon continues to look bleak. Import prices rose by 0.3% in the same month contradicting expectations of a mild decline and boosting the annual pace of increase to 14%. That data bears no influence on the outlook for monetary policy. Investors have already marked down stock index futures and the dollar index has rebounded by 0.3% to stand at 74.11 after a poor start to the week. Dollar bulls must exercise caution in this environment as the greenback is primarily higher against traditionally sensitive growth currencies and remains weaker against fellow safe havens. Industrial production data is due later in the morning session.
Japanese yen – Mr. Yen has been at it again and in an overnight interview predicted further gains for the yen at the expense of the dollar as the influence of both the U.S. and Europe weakens leaving investors banging in the door of safer havens. Former Finance Minister Eisuke Sakakibara told reporters that the U.S. was yet to deal with the fallout of the collapse of Lehman Brothers in 2008 and adding that burden to the yoke will open the door for the world’s number one economy to its own “lost decade.” Mr. Sakakibara is well-known for his ability to jawbone the yen and in this case he predicts that in the absence of further measures that the yen will rise against the dollar from its current ¥76.79 to ¥60.00. The dollar remains a little weaker against the yen on Tuesday and just looks strained rather than seeing any additional material impact from the market heavyweight.
Euro – Growth was pulled from beneath the feet of the Eurozone according to second quarter data released Tuesday. Across the zone GDP slipped to a pace of 0.2% from 0.8% in the first three months of the year and falling short of forecasts. Year-on-year the Eurozone expanded at a clip of 1.7% and down from 2.5%. Last week data proved that the French economy sputtered, while today’s report proved that the zone’s powerhouse, Germany, fared equally badly. The economy practically ground to a halt in the three months through June expanding by the smallest margin of 0.1% and well down from a first-quarter expansion of 1.3%. The annual pace of change fell to 2.7% from 4.7% and somewhat takes the wind out of the sales of the leading European nation. The euro accordingly slumped from a three-day high to $1.4355 although the weaker U.S. data helped couch its losses and it recently traded at $1.4391. Hopes are running perhaps a little too high for a successful outcome from Paris after European markets close on Tuesday when French and German leaders hold a press conference to deliver the outcome of the day’s summit.