U.S. shrinks Less than Forecast, Dollar Tumbles

By: Carl Hayes

The Euro, the Canadian dollar, and the U.K.’s pound, have all been gaining against the dollar and yen today in response to the U.S. economy contracting less than expected in the second quarter. The Commerce Department reported that the economy shrank by just 1 percent in the second quarter, in contrast to the massive 6.4 shrinkage in the first quarter of this year.

The dollar is also headed for its fifth month of depreciation today against the pound in its longest losing streak since 2004 in response to consumer confidence data from Britain showing British customers at their most upbeat since April 2008. Although problems in the U.K. remain, government and central bank action to expand the money supply appears to have provided some momentum to the economy, and inspired consumers to be more energetic during their trips to shopping malls.

Analysts note that the surprise in the GDP number was not very significant and that traders are simply using the occasion as an excuse to sell the dollar in the generally dollar bearish environment. Since inventory liquidation reached its peak during the second quarter, it is anticipated that the resultant restocking will fuel a rebound in growth in the second half of 2009. Others caution against reading too much to the temporary rebound as consumer spending continues to decline rapidly, with a more than twice as expected 1.2 percent contraction reported in the same GDP release. Many regard a sustained recovery in consumer spending a crucial component of a long lasting recovery, but for now, the bull market remains the dominant theme in trader’s minds and on the airwaves.

In a similar risk play, the Swedish krona, and the Polish zloty appreciated against the Euro as traders decide to move more assets to developing nation portfolios. With the problems in the Balkan and Baltic regions in suspense for now, more and more speculators are heading to the region to capitalize on the sharp rebound expected, leading to appreciation of regional currencies across the board.

All these events are coupled to a contraction in forex volatility as reflected in the six cent range of the EURUSD in July, in comparison to ten or twenty cents in some months of the past year. Many traders expect this situation to continue, perhaps interrupted by occasional shocks and readjustments during the next several months, as the global markets adjust to the new found optimism of speculators. Meanwhile, as turmoil in the markets recedes, and some sense of visibility returns to trading, those who would like to learn forex market trading find the courage to get back to the desk with renewed vigor: certainly, the great dynamism in the carry pairs is a sign that traders are regaining their past confidence and optimism.