The rally in the greenback reflects the market's concern that European officials will not deliver a grand master plan to save the euro next week. We started the week off with a nice dose of optimism but as the days progressed and European officials failed to admit that a deal is in the works, the rally in the euro hit a brick wall. This morning, the euro is lower against the U.S. dollar as investors cut back on their long positions ahead of the Ecofin and ECB meetings next week. Given the track record of European policymakers, there is a good chance they will drag their heels and forgo announcing a rescue plan for Europe to the disappointment of investors. Add to that the concerns about the possibility of an ECB rate cut and weaker German retail sales numbers and we can understand why the euro and other high yielding currencies have weakened against the greenback.
It mattered little that personal income declined 0.1 percent in August and personal spending growth slowed to 0.2 percent. Investors have come to expect weaker U.S. economic data and given the weakness of the labor market and decline in retail sales, the surprise would have been stronger and not weaker data. The decline in the personal savings rate to lowest level since September 2009 also reflects the deterioration in wealth in America and the country's inherent social and economic problems. Chicago PMI and the final University of Michigan Consumer Confidence reports will be released later this morning. We do not expect these numbers to have a material impact on the U.S. dollar because unless we have a major upward revision to confidence and a jump in manufacturing activity in Chicago, the Federal Reserve could still increase stimulus.
With 4 central banks holding monetary policy announcements next week, the dollar could rally as investors position for a more dovish stance from the central banks. The latest GDP numbers from Canada showed the country's economy growing by 0.3 percent, a slightly faster pace than the previous month which may alleviate some of the Bank of Canada's concerns about their economic outlook, but considering that this data is from July, it is quite dated.
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