Dollar Suffers Mixed Signals on Data and Budget Debate British Pound Rallies after Mediocre GDP – Growth in Austerity Euro Ignores ECB Noyer’s Hawkish Musings, Poor Bond Auctions Australian Dollar Surges to Post-Float Highs on Strong CPI Figures New Zealand Dollar Looks Exposed as the RBNZ Decision Approaches Swiss Franc Seems to Have Dollar Rally Locked Regardless of Euro Gold Crawls on to Fresh Record Highs, US Crisis Clock Ticking Dollar Suffers Mixed Signals on Data and Budget Debate Though there was a significant drop in risk appetite through capital markets, a strong showing in consumer confidence and a remarkable rally from the US three-month Treasury bill; the greenback put in for a pained performance through Tuesday’s close. In fact, the Dow Jones FXCM Dollar Index (ticker = USDollar) marked its lowest close on records going back to 1999 and hit an intraday low through the new trading day’s Asian session for good measure. Why the disconnect? We have long ago left behind the era where scheduled event risk would generate an immediate and direct reaction from the greenback. However, there are still a few disciples that believe the currency maintains its position as a favored safe haven; and higher market rates would have leveraged a rally as recently as a month ago. The tumble to new lows today is a reflection of the prominent risks that the dollar and its economy faces as the threat of a downgrade grows. Keeping tabs on the budget standoff, there was no official statement from either US President Obama or House Speaker Boehner since Monday evening’s addresses that levied the blame against their respective counterparts. On the other hand, we did learn that the House of Representatives have postponed the vote on Boehner’s budget after non-partisan experts said it would not lead to the savings that were claimed. Regardless of whether this is the most effective plan or not, pushing back any viable solution for yet another day of debate simply erodes the market’s confidence. In the meantime, Obama’s Chief of Staff Bill Daley reiterated the White House’s belief that Boehner’s bill would not pass the pass the Senate and the Chamber of Commerce’s endorsement of the piece of legislation was “unfortunate”. In response to rumors that the president could evoke the 14th amendment to push through a hike to the budget ceiling, Daley said it would not be a “realistic answer”. Indeed, rating agencies seem to be caught in the gravity of a downgrade should a long-term deficit solution not be adopted. The threat of even a one-step downgrade to the United States’ top credit rating will completely distract the market until it is clear (or reasonably clear) that the benchmark Treasury is no longer in jeopardy – or until after the volatility dissipates following the market-changing cut. In the meantime, we should take note that the highly-liquid three-month T-Bill enjoyed its biggest single day jump since June 5th 2009 and the equivalent Libor rate is slowly starting to turn higher. One of the most prominent weights on the greenback’s shoulders is its exceptionally low market rate (honing in on the very foundations of any market interest in risk/reward). However, this bump in yield is a reflection of sliding demand or short-term Treasuries; and the return falls far short of compensating for the quickly rising risk. On the data front, the US consumer reported an unexpected improvement in confidence according to the Conference Board’s sentiment survey; but jobs, wages and planned major purchases were all struggling. In the upcoming session, we should watch for the Durable Goods release; but keep expectations for volatility tempered.

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