Closing Market Recap: U.S. Dollar Skyrockets as Olympics Begin

News Recap | Written by CEP News | Aug 08 08 20:36 GMT |
(CEP News) - The U.S. dollar raced ahead in gold medal-fashion on Friday as the Beijing Summer Olympics began. The "U.S.A." chants from the forex market were virtually audible as investors rushed to get on the bandwagon in what some analysts were calling a watershed day for the long-suffering greenback.

"The US multi-year down trend is over. The process we described as 'carving out a bottom' has been completed. Recent days have been a watershed, but it has been a long time in the making," wrote Marc Chandler, global head of currency strategy at Brown Brothers Harriman in a note to clients.

The currency rally pushed down dollar-denominated commodities and that boosted U.S. equity markets. Rising stock markets gave investors another reason to buy U.S. dollars - something economists call a virtuous cycle.

The greenback posted its largest one-day gain against the euro in seven years as it surged to six-month high. The U.S. dollar also hit a 17-month high against the British pound and 11-month high against the Canadian dollar.

In Canada, a report showed the economy shed 55,000 jobs in July, shocking economists who believed the country had added 5,000 jobs. Markets responded by pricing in Bank of Canada interest rate cuts.

"After this morning's jobs report, it's safe to say that the boom in the Canadian labour market is over," said Dina Cover, economist at TD Securities.

There were some statistical anomalies that had economists scratching their heads. Even though it was the worst jobs report in 17 years, the unemployment rate ticked down to 6.1% as a large number of people - particularly youth - dropped out of the workforce.

The Canadian dollar fell 1.5 cents but currency strategists said the move in CAD/USD was predominantly a USD story. Even with the employment report, the loonie made gains on the euro, Australian dollar and Swiss franc.

Adam Fazio, currency strategist at CIBC World Markets, said markets are pricing in economic weakness around the globe.

"In the U.S., the credit crisis is well discounted by markets. The linkage between Canada and the U.S. is well-known and heavily discounted," he said.

Now, Fazio warns, investors are pricing in global interest rate cuts and bank failures as other countries experience the malaise the U.S. has been battling.

"It's kind of like the reality show, 'The Biggest Loser'," he said.

The powerful moves on Friday were the result of an extended period of range trading, Fazio said.

"A period of range trading is like a spring that coils tighter and tighter. This is what happens when key levels break," he said.

The Canadian dollar was down 0.0134 to 0.9377 against the U.S. dollar (1.0664 USD/CAD) and down 0.62 to 103.32 against the yen.

"The prospect for more U.S. dollar strength is very high on Monday," Fazio said.

The U.S. dollar was up 0.72 to 110.17 against the yen and the Dollar Index was up 1.286 to 75.833.

The pound sterling was down 0.0221 to 1.9218 against the U.S. dollar and up 0.0019 to 2.0491 against the Canadian dollar.

The euro was down 0.0299 to 1.5025 against the U.S. dollar, down 0.0113 to 1.6023 against the Canadian dollar, down 0.0065 to 0.7818 against the pound sterling and was lower by 2.18 to 165.52 against the yen.

Fazio said the appetite for dollars was fuelled by changing interest rate expectations. Economists say the Bank of Canada is firmly on the sidelines but that the bond market is betting on interest rate cuts by the end of the year.

Short-term fixed income rallied following the Canadian employment report. At the Montreal Exchange, the Sept. BAX contract was up 0.060 to 96.965, the Dec. contract up 0.040 to 97.240 and the Mar09 contract up 0.060 to 97.310 - all on some of the highest volumes in months. At those levels, the contracts are pricing in a 30% chance of a cut at the Sept. 3 Bank of Canada meeting and at least two cuts by the end of the year

Yields on two-year Canadian government bonds were down 5.5 bps to 2.72%, with five-year yields down 4.0 bps to 3.09%, 10-year yields down 3.6 bps to 3.61% and 30-year yields down 2.2 bps to 4.05%.

U.S. two-year yields were up 6.4 bps to 2.49%, with five-year yields up 4.7 bps to 3.19%, 10-year yields were up 0.8 bps to 3.93% and 30-year yields were down 1.8 bps to 4.54%. The Eurodollar March 09 contract was down 4.5 ticks to 96.92. The yield curve was flatter, with the 10/2-year spread down 6.1 bps to 141.80 bps.

In Germany, returns on two-year German bonds were down 3.5 bps to 4.06%, with five-year yields down 1.8 bps to 4.07%, 10-year yields flat at 4.26% and 30-year yields up 2.7 bps to 4.69%.

Yields on UK two-year bonds were up 2.7 bps to 4.67%, with five-year yields up 1.1 bps to 4.62%, 10-year yields flat at 4.68% and 30-year yields up 0.6 bps to 4.45%.

Energy markets were a big story, as crude closed at its lowest since May 1 and were largely responsible for a surge in U.S. stocks and some softness in Canada. WTI crude oil was down $5.02 to $115.00. The front month gold contract at the Chicago Board of Trade was down $13.50 to $864.40 per ounce.

Toronto's S&P/TSX composite index closed down 43 points to 13342, the Dow Jones industrial average up 303 points to 11734, the S&P 500 up 30 points to 1296 and the Nasdaq up 58 points to 2414.

European stock markets closed in positive territory with the Eurostoxx up 17 points to 2928, the UK FTSE 100 up 12 points to 5489 and the German DAX up 18 points to 6562.

The focus in the week ahead will continue to be on worldwide growth but the U.S. will also be in the spotlight. Market watchers will have a chance to gauge how steep home price declines are affecting the American consumer as retail sales figures are released on Wednesday. The Reuters/University of Michigan survey of consumer sentiment will also be released on Friday.

All data taken at 4:20 p.m. EDT.

By Adam Button, abutton@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it , edited by Stephen Huebl, shuebl@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it

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