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• US Dollar Marks a New Yearly Low Despite a Promising Jump in Retail Sales
• British Pound Hurt by Deflation, Brown's Planned Spending Cuts
• Euro Buoyant after Pick Up in Business Confidence, Ahead of CPI Data
• Australian, Kiwi Dollars Must Fall Back on Risk Appetite Following Disappointing Data

US Dollar Marks a New Yearly Low Despite a Promising Jump in Retail Sales
What is the extent of risk appetite's influence over the US dollar? Can this undefined fundamental driver overwhelm the influences of growth forecasts and interest rate expectations? Considering today's reaction to the far-better than expected outcome for the retail sales report (an indicator that has proven itself a market mover in the past), it would seem that the influences of investor sentiment are more pervasive than many had expected. Taking note of the dollar's progress today, the currency closed at its lowest level on a trade-weighted basis since September 22nd of last year. The greenback suffered a less dramatic fate against its major-counterparts. EURUSD was the standout, reaching yet a new high for the year and subsequently eating up the spike back on December 18th that brought the initial post-financial crisis reversal to an abrupt end. In contrast, USDJPY and GBPUSD closed positive session for the dollar while the commodity bloc maintained moderate ranges.

Today's scheduled, US event risk offered a conclusive reading for the US dollar - that risk trends are still the single most influential driver. Topping the economic docket through the early New York session was the Advanced Retail Sales reading for August. Admittedly, the market was already discounting the outcome due to the obvious success of the ‘cash-for-clunkers' program. A 1.9 percent forecast set the bar high; but the 2.7 percent reading was above and beyond what was priced in. Looking beyond that fact that this was the biggest jump in sales since January of 2006, details of the report show the improvement was in fact broad-based and not simply the product of the government's short-lived program. Excluding auto and auto part sales (which jumped 10.6 percent), receipts rose 1.1 percent - the most since January. With growth in electronics, clothing, merchandise and sporting goods sales, this is evidence that consumer spending may support an economy recovery despite troublesome employment and wage trends. However, despite the bullish reading, the data was absorbed with little lasting influence on the battered dollar. The positive implications for risk appetite would complicate the reaction and ultimately leave the dollar little affected.

The other listed event risk for the day would further support the bullish bias - but derive the same outcome from the dollar. Headline producer-level inflation jumped 1.7 percent last month on a jump in gasoline and in doing so pull the year-over-year reading up from its worst pace on record. The Empire Manufacturing survey for September reported New York area factory activity hit a 22-month high through a pickup in new orders in prices paid - though the forecast components were a step back from August. Even Fed Chairman Ben Bernanke's commentary was encouraging. The central banker affirmed that the recession had very likely, but he went on to suggest that the recovery would feel very week. Ultimately though, with the benchmark US three-month Libor rate at its lowest level on record (and below its Japanese and Swiss counterparts), additional signs of a measured recovery will struggle to bolster the dollar in speculators' eyes.

Related Articles: US Retail Sales Jump the Most in Three Years

British Pound Hurt by Deflation, Brown's Planned Spending Cuts
While the US dollar was topping headlines for pushing new lows against its benchmark counterpart; it was the pound that was the weakest performer for the day. The first round of fundamental data to the wires was contributing to the slow appreciation through the Asian session. The RICS House Price Balance report turned positive (more survey respondents reporting rising rather than falling home values) for the first time since July of 2007. However, it was inflation that fundamental traders were truly concerning themselves with. The headline CPI reading for August slipped less than expected in its annual pace; but the 1.6 percent pace was nonetheless the weakest since January of 2005. For a currency that has long found its strength through the relatively high level of return in its domestic asset base, this is another reading to support the reality that the Bank of England will likely hold to their vow to hold rates at their record low until late 2010. However, it should be noted that the current rate is not far off target. Should economic growth take hold (still a ways off), inflation would likely be soon to follow and the highly responsive MPC can be prompted to action. Speaking of the BoE, Governor Mervyn King said the group was considering lowering the deposit rate paid to banks that hold their reserves with the policy authority. The aim of such a move would be to encourage lending to consumers and businesses; but for currency traders it is just another sign of policy easing and another step away from eventual rate hikes.

Related Article: British Pound Falters as BoE Governor King Maintains Dovish Outlook

Euro Buoyant after Pick Up in Business Confidence, Ahead of CPI Data

The euro has benefited from the dollar's malaise over the past weeks and months. As the primary counter-currency to the greenback, the unit enjoys the capital that is moving out of the US as concerns over deficits; reserve currency status and yield potential weigh on the future. However, is the euro really in a better position than its more liquid counterpart? Data today offered a modest boost to the economic outlook. The German ZEW Investor sentiment survey for September fell short of forecasts but nonetheless hit its highest level since April of 2006. It is difficult to say how much of this was due to the unexpected, positive turn in German and French 2Q GDP as well as the stubborn optimism in stocks; but both of these factors have their drawbacks. Sentiment in capital markets is largely based on expectations of a steady market climb to fuel expectations for return. As for growth, there is a great disparity in recovery among EZ members which will come through in future months.

Australian, Kiwi Dollars Must Fall Back on Risk Appetite Following Disappointing Data
Despite the weakness in the US dollar (the primary safe haven currency), the commodity block was making little progress through Tuesday's session. Back-and-forth in equities through much of the Asian and European sessions left the Australian and New Zealand dollars to defer to a disappointing wave of economic data. The second quarter manufacturing activity report from New Zealand marked a record 4.8 percent tumble. This is additional evidence that the economy contracted through the second quarter (GDP figures will be released next Tuesday) - extending the worst recession in decades. As for the Aussie currency, second quarter dwelling starts unexpectedly dropped 3.7 percent to extend the worst trend since 2004/2005. More influential though was the RBA's minutes in which they bolstered the negative risks going forward.

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Written by: John Kicklighter, Currency Strategist for