Euro Maintains Strength As Poor US Earnings Raise Fears of Recession

Talking Points

• Japanese Yen: weak Dow futures weigh despite rally in Nikkei
• Swiss Franc: Trade surplus at record high on emerging market demand
• Euro: Safe haven bid continues
• British Pound: M&A news keeps cable above 2.0000
• Canadian Dollar: Retail Sales on tap
• US Dollar: Fed speak and consumer confidence on tap

Euro Maintains Strength As Poor US Earnings Raise Fears of Recession

Poor results from American Express, Texas Instruments and Apple all released after the close of US equity trading yesterday continued to weigh on the dollar in overnight currency trade. At one point, the Dow Jones Industrial Average futures were down more than 100 points in electronic trading on CBOT pushing the EURUSD towards the 1.5950 level as the single currency attracted safe haven flows on fears of looming US recession.

The news from American Express was especially troubling for market observers because it suggested that the weakness in the US consumption may be spreading to the strongest segment of the sector. AMEX which caters to more affluent strata of consumers in the US economy noted that, 'Credit indicators as we signaled a few weeks ago deteriorated beyond our expectations, and by almost any measure the US economy and business environment are much weaker than the assumptions we first spoke to you about back in January and the conditions that existed in early June. Now this fallout was evident across all consumer segments, even our longer-term super prime card members.'

The disappointment from AMEX may be an early warning sign that overall US consumer demand is on the verge of collapse as record high energy and food costs, declining housing price and rising unemployment have sharply curbed spending leading to a possible contraction in GDP in the second half of the year. Should that be the case, any expectations for a fed funds rate hike before the year end can be thrown out the window. Already the probability in the Fed funds futures for a hike to 2.25% by December 2008 has dropped from 72% to 42% indicating that traders see little chance of Fed tightening as US economic conditions worsen. The current backdrop continues to favor the euro as the unit holds a 225 basis point advantage on the greenback in interest rate differentials.

On the economic front we've had a second straight night of virtually no news as the global calendar is heavily skewed towards the back end of the week. In Japan All Industry Activity matched expectations coming at 0.4% lower than the month prior but the yen strengthened on risk aversion flows as US equity futures declined by triple digits. In the meantime in EZ Italian consumer confidence plunged to 95.8 from 99 forecast but the news produced only a fleeting downdraft in EURUSD as for now currency traders are ignoring the negative news in EZ and focusing only on the problems in the US economy.

DailyFX

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