USD Retreats but Remains Elevated

USD

After gaining much of yesterday, the U.S. dollar retreated against most of its rivals overnight.  Overall, the theme remains the same: the U.S. dollar is elevated on the expectation of further policy divergence between the Federal Reserve and central banks abroad.  The Bloomberg Dollar Spot Index has held near its seven month high over the past two weeks.

Yesterday’s U.S. data was mostly positive but did not greatly affect the greenback’s direction. However, economic data during the second half of the week should provide the dollar catalyst for volatility.  Later this morning, Service PMI is expected to show a slight improvement in October from September.  Wholesale inventories and new home sales will also be released and are expected to build on the previous month’s result.   However, attention will quickly shift to tomorrow’s durable goods print for longer-term signs of investment in the economy.

EUR

The Euro pushed off recent lows overnight even as economic releases were mixed.  Consumer confidence in two of the Eurozone’s largest economies, Germany and France, improved modestly.  However, retail sales from Italy fell below expectations.  The data comes as little relief for the common currency which remains within striking distance of its weakest level in seven months versus the U.S. dollar.

Indeed, hedge funds and other large speculators increased net short positions on the euro against the dollar, betting on a decline, by the most since July.

AUD

The Australian dollar extended its gains from Tuesday against the U.S. dollar overnight.  Aussie consumer prices rose 1.3% from a year earlier; beating a previous print ad decreasing the likelihood the Reserve Bank of Australia will find the scope to cut interest rates in the New Year.  The probability for a rate cut by mid-2017 dropped to 29% from 37% yesterday.  The Aussie found support on Tuesday following a sharp rally in commodity prices, especially industrial metals.