Previous session overview
One day after trading within a fraction of its all-time low against the euro, the US dollar soared Tuesday as improved U.S. economic data and weak European data turned the tables in currency markets.
The euro dropped more than 300 points Tuesday from its Monday high, while the dollar advanced three full yen against Japan's currency and hit a two-month peak against the Canadian dollar.
The dollar donned its rally cap early Tuesday during the Asian session after Swiss banking giant UBS AG (UBS) announced another $19 billion in write-downs on illiquid U.S. real estate assets. Then came reports of weak retail sales data in Germany for the month of February. Suddenly, investors who had sold the dollar for months on the belief that Europe's economy was repelling the harmful effects of the U.S. economic problems, began to re-evaluate those views.
U.S. economic data released Tuesday were far from strong, but that didn't keep the dollar bulls from continuing to lunge forward. The March Institute for Supply manufacturing index came in at 48.6, surpassing economists expectations of 47.5 and rising a tad from February's reading, but staying within contraction territory. Currency investors chose to ignore the generally weak number, and focused purely on the fact that the data beat expectations.
The euro at one point fell to as low as $1.5563, well off its all-time high of $1.5905 reached last month. The dollar's gains extended well beyond the single currency. Against the Canadian dollar, the U.S. currency climbed to C$1.0326, its highest level since late January, as lower oil prices weighed on the Canadian currency. Canada's dollar did stage a recovery late in the session, however.
The U.S. dollar hit a nearly three-week high against Japan's currency Tuesday on the back of a yen-selling spree generated by a surge in U.S. stock markets. As stocks prices rise, currency investors become more willing to take riskier bets, and they therefore sell the low-yielding Japanese currency to buy higher-yielding assets.
Analysts said the dollar was poised to make a broad move higher, as the market had extremely shorted, or oversold, the dollar.
Market expectation
Today, ADP employment report and US factory orders are on the agenda. However, the appearance of Mr. Bernanke before Congress will be the eye-catcher. Bernanke probably will elaborate on the measures to be taken to ease the pain of the housing crisis, not only by the Fed but also by politics. We don't have a strong view on the relevance for markets, but in line with yesterday's sentiment, the dollar could get some additional push in the back on the feeling that authorities prepare coordinated action to stop the bleeding of the credit crisis.
Despite the dollar's broad gains Tuesday, some analysts warn the rally may simply be setting up the greenback for an even bigger drop on Friday, when an important report on U.S. employment levels is released. Forecasts call for more declines in payrolls and a rise in the unemployment rate.