U.S. Dollar Struggles as Consumer Sentiment Weakens

October 25, 2013

New York (Oct 25)  The U.S. dollar struggled for direction Friday, attempting to rebound from a nearly two-year low versus the euro, as end-of-week position-squaring competed with lackluster economic data, including a steeper-than-expected fall in consumer sentiment.

The ICE dollar index--which gauges the U.S. unit against six other majors--traded at 79.206, little changed from late Thursday's 79.211. The index is on track for a 0.6% weekly decline, which would bring its drop since the start of October to around 1.3%.

The WSJ Dollar Index, an alternate measure of the greenback, rose to 71.76 from Thursday's close at 71.70.

"The subdued movement in dollar partly reflects expectation that Fed will maintain its asset-purchase program intact in next week's policy meeting," ICICI Bank analysts wrote Friday.

Economic data continued to paint a picture of a fragile U.S. economic recovery. A rebound in demand for jetliners helped push September durable-goods orders up a stronger-than-expected 3.7% in September, the Commerce Department said Friday. But the more closely followed "core" measure of demand, which strips out the volatile transportation sector, dipped 0.1% that month.

Meanwhile, the University of Michigan/Thomson Reuters consumer-sentiment index fell to 74.8 in October, versus a reading of 77.5. Economists had forecast a reading of 74.8.

The euro earlier drove to an intraday high at $1.3832, its strongest level since November 2011, and changed hands in recent action at $1.3802, little changed from its level in North American trade late Thursday.

The euro gained ground despite an unexpected drop in Germany's Ifo index, a key gauge of business sentiment in the euro zone's largest economy. Still, overall sentiment remains robust and the economic recovery intact, economists said.

Nevertheless, the euro's push above $1.38 is making some traders nervous, noting potential unease among European policy makers and businesses, as well as overbought technical conditions.

"We have turned tactically negative on [the euro/dollar currency pair], as we expect the [European Central Bank] to ease further if the pair threatens to break upward. The positioning in euro is probably net long versus the dollar, which could also cap the upside for the pair," said strategists at Credit Suisse.

Credit Agricole said the euro had enjoyed recent support due mostly to stable interest-rate expectations in the euro zone, as well as "more constructive global risk sentiment.

"In an environment of capped Fed monetary-policy expectations and still relatively stable euro-zone growth data, there appears to be little that can trigger a major turn in pairs such as euro/dollar, at least not ahead of next month's [European Central Bank] press conference," Credit Agricole analysts said in a note early Friday.

"Accordingly, we remain of the view that the euro is facing additional upside in the short term," they wrote.

The British pound rallied in early action but set back to trade at $1.6174, little changed from $1.6170 late Thursday.

Sterling initially rose after data showed the U.K. gross domestic product grew at the fastest rate in more than three years during the third quarter, signaling that the country's recovery was picking up steam.

"Back at the start of the year, the belief was that the pound was going to get beaten down by a new central bank governor intent on pursuing further quantitative easing. Partly by market misjudgment, more owing to the upward surprises to activity data, we've seen a dramatic turnaround in the fortunes of the currency, which has been partly unwound during October relative to the euro," said Simon Smith, chief economist at FxPro in London.

The euro rose 0.3% versus the pound to trade at 85.40 pence.

The Australian dollar bought 95.97 U.S. cents, having temporarily bobbed back above the 96-cent level after sitting at 95.83 U.S. cents late Thursday.

The Japanese yen trimmed gains as the dollar traded at 97.31 yen versus late Thursday's Y97.39. The move slapped the currency-sensitive Tokyo stock market, where the Nikkei Stock Average lost 2.7%.

RBC Capital Markets strategist Adam Cole wrote Friday that a buildup of long positions in the dollar-yen pair held outside of Japan "has, if anything, extended further during the last month's largely negative price action.

"The closer we get to year-end, the greater the risk of a more material correction lower in dollar-yen, and we retain our long-standing forecast that the pair will end the year at 92" yen to the dollar, he wrote.

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