Dollar Still Vulnerable
The US dollar was broadly mixed last week. Its gains were strongest against the New Zealand dollar and Australian dollars (~3.6% and 1.70% respectively). The Norwegian krone and Canadian dollar lost almost as much ground as the Aussie.
On the other hand, Swedish krona and Swiss franc were the strongest currencies (~0.5%), owing in part to a pre-weekend recovery, helped in part by unexpectedly poor July US new home sales (fell 13.4% compared with expectations of a 2% decline and the June pace was more than halved to 3.6% from 8.3%). The subsequent US Treasury rally, that saw 10-year yields fall 6 bp, helped knock the wind out of the dollar sales against the yen too; against which it had traded above JPY99 for the first time since the beginning of the month.
Although the UK recovery was confirmed as Q2 GDP was revised up and evidence suggest the pace of expansion has not slackened, sterling drew little succor. Sterling peaked mid-week above $1.57 and slipped lower in the second half of the week, giving back every thing it gained in the first part plus some and finished the week off by about 0.4%.
Broadly speaking, we still see some near-term downside risks for the US dollar. We note that the US-German 2-year interest rate differential finished last week near 9 bp, the lowest in two months. More importantly, with Fed tapering so widely expected, and arguably overly discounted, the dollar is particularly vulnerable to disappointing data, or anything that encourages the market to scale back its expectations.