Data Caps USD Gains by Korman Tam

The greenback posted its largest weekly gain on a trade-weighted basis in a month despite relinquishing its grip in Friday trading. Nevertheless, lingering fears over credit conditions and the credibility of banks’ balance sheets continue to plague the currency. Accordingly, the currency market will continue to be closely correlated with equity market moves – particularly the trajectory of the carry trade pairs, amid times of heightened volatility.Economic data released earlier in the session derailed the dollar’s rebound against the majors, pushing it toward session lows versus the euro and sterling. Industrial production for October fell by 0.5%, missing expectations for a 0.1% increase and reversing the previous month’s 0.2% increase. The decline in industrial production also marked its largest drop in over two-years, reinforcing fears that the housing slowdown continues to weigh on manufacturing. Capacity utilization was largely inline with expectations at 82.0%, down marginally from the previous month at 82.1%. The September TICs report revealed a net outflow of $14.7 billion versus a downward revised outflow of $150.7 billion in the prior month.

Fed Board Member Kroszner downplayed the prospects for another FOMC rate cut over the coming year, saying “the current stance of monetary policy should help the economy weather the rough patch during the next year, with growth then likely to return to its longer-run sustainable rate”. Fed members have been tempering market expectations for another 25-basis point rate cut at the December FOMC meeting particularly after market sentiment in October fully discounted an ease despite the actual decision being much closer than expectations suggested. Kroszner reiterated the FOMC’s statement from October, saying downside risks to economic growth appear to be roughly balanced by the upside risks to inflation – maintaining the Fed’s neutral stance.

Traders will turn their attention to comments from the upcoming G20 Finance Ministers meeting this weekend in South Africa. Given the growing unease among government officials over the dollar’s rapid decline, we look for discussion on global imbalances as well as currency valuation. The more likely focus will be on China’s rigid exchange-rate regime, rather than the dollar’s accelerated declines over the past few months. US Treasury Secretary Hank Paulson reiterated that he expects currency issues to be deliberated this weekend, while BoE Governor King stressed the need for greater currency flexibility to alleviate “great currency tensions”.