Dollar Strengthens on GDP/Oil Reversal

Overall: Better-than-expected readings for Q2 GDP and weekly claims for unemployment benefits, along with a reversal in oil prices, supported the dollar during trading on Thursday. As far as Q2 GDP is concerned, the biggest contributor to growth was the reduction in the trade deficit to $376 billion, the smallest in eight years. Exports added 3.1 percentage points to GDP which means that ex-exports, the economy expanded by just 0.2%. The second quarter is likely to represent a peak for the year because with stagnation or outright contraction occurring in the U.K., Japan and the Euro area, along with the dollar's recent appreciation, the contribution from exports is likely to wane going forward. Still, the economy does look set to expand around 1.5% in Q3, given the numbers from yesterday's Durable Goods report.

The euro (Euro/Usd) declined with crude oil futures once the EIA announced it might release oil from the strategic reserve if Tropical Storm Gustav damages production facilities in the Gulf of Mexico. In Germany, the Federal Labor Agency said the seasonally adjusted number of unemployed workers declined 40,000 to 3.2 million after falling 20,000 in July. The rate fell to 7.6%, the lowest since May 1992. Still, the economy contracted in the second quarter and economists are projecting that employment will weaken in the second half of the year. On Wednesday, European Central Bank council member Axel Weber provided a temporary boost when he that said talk about interest rate cuts from the ECB is premature and that a rate hike may be needed once the economic outlook “brightens,” although it is doubtful to see much brightening until U.S. home prices show signs of stabilization.

The cable (Gbp/Usd) re-tested the 2-year low on 1.8300, and the pair declined after Nationwide, Britain's fourth-largest mortgage lender, reported that U.K. home prices fell at a 10.5% annualized pace in August, the fastest rate of decline since the last quarter of 1990. Prices fell 1.9% from July, the tenth consecutive monthly decline. The British Bankers' Association said August 26 that mortgage approvals were near the lowest in 11 years during July, with the 22,448 approved mortgages representing a 65% decline from the same period a year ago.

The aussie (Aud/Usd) received support after a report from the Australian Bureau of Statistics said second quarter capital spending jumped 5.7%, which may have led some speculators to believe the RBA might hold off on reducing borrowing costs at its September 2 meeting. The aussie has lost about 13 cents to the dollar from the peak hit on July 15 as commodities declined and speculation grew the RBA will reduce borrowing costs at its September meeting.

The cad (Usd/Cad) rose the most in almost 3 weeks as oil and other commodities reversed their earlier advances. The loonie had risen 1.3% since August 15 but has still declined 3.9% since the July 11 crude oil high on $147.27 per barrel. Traders will be paying close attention Canada's GDP report on Friday, as the BoC is being tipped to decrease its main lending rate on September 3.

The swissy (Usd/Chf) moved well off its lows as traders in New York moved into equities and away the safety of U.S. debt on Thursday. The pair has range-traded over the past 10 sessions along with the S&P, but may be getting ready to break out if the S&P can close at its highest level since August 15.

The yen (Usd/Jpy) chart looked much the same as the swissy after traders bought stocks on Wall Street. Stocks received an extra boost after the EIA said it would release strategic reserves if Tropical Storm Gustav damaged production facilities in the Gulf of Mexico. The storm is expected to return to hurricane strength as it enters the Gulf late Sunday or early Monday.

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