US Consumer Confidence Drops
The dollar posted gains vs. the euro and losses against the yen as markets gear up for Fed chairman Bernanke’s testimony to congress scheduled to take place on Wednesday and Thursday. UD data which showed a decline in consumer confidence pared demand for risky assets and currencies. In February US consumer confidence fell to the lowest in ten months and labor outlook worsened. Matthew Strauss of RBC Capital Markets stated, “I’m not surprised to see the forex markets reacting to (consumer confidence) by shifting positions into safer assets. The headline may be overstating the softness in consumer behavior but it highlights risks to the economic recovery going forward.. The shift from government-induced growth to consumer-led growth will not be without disappointment. We can’t see fed funds going up before the fourth-quarter of this year. In the short-term, safer assets, such as the yen, will get a bit of a boost.”
Apprehension Ahead of Bernanke’s Congressional Testimony
In addition the Standard & Poor’s/Case-Shiller index of home prices in 20 cities showed a 0.2% decline in December from November 2009 and an annual 3.1% decline. Apprehension about Bernanke’s testimony contributed to the rise in risk aversion and demand for safe haven currencies like the yen. The Standard & Poor’s 500 Index fell 1.2% and the MSCI World Index also fell 1.2%. Brian Dolan of FOREX.com stated, “It’s an abysmal consumer confidence number and the risk trade is under pressure as a result. Treasuries are rallying, yields are falling and that pushes the yen higher.”
German Business Sentiment Unexpectedly Declines
The euro accelerated its decline against the greenback after Germany’s Ifo business sentiment index showed an unexpected decline. In addition French consumer spending numbers and Italian confidence data were below forecasts pressuring the already troubled euro further. As if that wasn’t enough bad news for the euro Ifo economist Klaus Abberger said that the German economy may have contracted during the first quarter. Germany is the euro zone’s largest economy. Markets remain troubled by Greece’s debt problems and investors are concerned that Greece’s austerity measures may not be enough to prevent a bailout by the EU or the IMF. Referring to the euro negative tone in currency markets Alan Ruskin of Royal Bank of Scotland stated, “The euro tone is so negative that strong data is helpful for the dollar (via rates), and weaker data is seen as mild negative for the euro (because of risk appetite consideration). This ‘heads you lose, tails you lose’ logic can be dangerous, but is symptomatic of the negative euro tone.” Until the euro zone solves Greece’s problems the euro is likely to remain under pressure for some time to come.
