Poor GDP number and dollar rallies??

Follow my logic and tell me I go wrong...I totally understand the 'the market goes where it wants to' rule, but I want to make sure my logic is right....

Poor GDP number means that economy is slowing....a slowing economy means we're less likely to see rates rising in the future, which should mean a weaker dollar....but it rallied today from 830 on! I understand that Snow later said to not worry about it much, but it rallied from the announcement.

Am I wrong??

http://www.bloomberg.com/news/markets/currencies.html

Dollar Rises After Inflation Gauge Accelerates and New-Home Sales Increase

Jan. 27 (Bloomberg) -- The dollar rose against the euro and yen on expectations the Federal Reserve will keep raising interest rates after a measure of inflation accelerated in the fourth quarter and sales of new homes unexpectedly increased.

The inflation gauge reinforced speculation the central bank will raise its benchmark rate two more times, even after the government said U.S. economic growth slowed more than forecast last quarter. The Fed has raised the rate 13 times since June 2004 to 4.25 percent, helping spur a 14 percent rally in the U.S. currency versus the euro and yen last year.

``They were definitely disappointing growth numbers but with high inflation, it means the Fed has to keep its eye on'' price increases, said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``It's too early to write off the dollar.''

The dollar rose for a fourth day against the euro to $1.2094 at 5 p.m. in New York from $1.2207 late yesterday. It also advanced to 117.33 yen from 116.44. The U.S. currency gained 0.3 percent versus the euro and 1.8 percent against the yen this week. Its gains against the euro in the past four days erased the 1.4 percent tumble of Jan. 23.

Traders in rate futures expect the Fed to lift its overnight rate to 4.5 percent on Jan. 31. They see a greater than 70 percent chance of an increase to 4.75 percent on March 28, based on futures yields before the first-quarter growth report. Higher interest rates make a country's debt securities more appealing to foreign investors, who need the currency to buy them.

`Still Inflation Pressures'

The core personal consumption expenditures index rose at a 2.2 percent rate, compared with 1.4 percent in the third quarter and a 1.7 percent pace in the second quarter. Fed policy makers use the core index as their inflation measure of choice.

Gross domestic product, the value of all goods and services produced in the U.S. rose 1.1 percent, from 4.1 percent in the third quarter, the Commerce Department said in Washington. Economists expected the economy to expand at a 2.8 percent rate, based on the median estimate of 72 economists in a Bloomberg survey.

``The price index showed there are still inflation pressures,'' said Kathy Lien, a currency strategist in New York at Forex Capital Markets LLC. ``Given the mixture of the data we're still on path for a quarter-point increase at the end of this month.''

Sales of new homes rose 2.9 percent in December to an annual rate of 1.269 million, capping a fifth straight record year for the housing industry. Economists expected a 1.225 million sales rate for December.

Short Positions

Reports on durable goods orders and unemployment claims yesterday signaled strength in the U.S. economy. Orders at U.S. factories for durable goods last month increased 1.3 percent, the Commerce Department said yesterday. Economists surveyed by Bloomberg expected a 1 percent December gain. Jobless claims rose by 11,000 to 283,000; economists expected 300,000.

``Today the market showed it was positioned short dollars and today was an unwind,'' said Russell LaScala, a currency trader in New York at Deutsche Bank AG, the world's biggest foreign-exchange trader.

Futures traders increased bets the dollar will fall versus the euro, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on a fall in the U.S. currency compared with those on a rise was 37,464 on Jan. 24, compared with 21,211 a week earlier.

Faster Growth Expected

Growth will pick up this quarter, to a 3.8 percent annual rate, and average 3.4 percent this year, according to a survey of economists in a Bloomberg survey from Dec. 23 to Jan. 9.

The yen advanced earlier against the dollar and euro after a report showed Japanese consumer prices had the first back-to-back monthly gain since April 1998. Prices gained 0.1 percent last month from a year earlier, the same as November.

``An end to easy monetary policy is just a matter of time,'' said Nobuo Kihara in the foreign-exchange marketing division at BNP Paribas in Tokyo. The consumer price index ``report gave a reason to buy back the yen.''

Bank of Japan Governor Toshihiko Fukui yesterday said Japan will shift policy ``at an appropriate time,'' once the central banks is convinced more than seven years of falling prices has ended. Prime Minster Junichiro Koizumi said today at a press briefing in Tokyo that Japan has yet to ``overcome'' deflation.

The euro rose immediately after a report showed consumer optimism in Germany climbed to the highest in eight months in January.

GfK's confidence index climbed to 4.6 from last month's revised 4.0, the market-research company said today. The index's three components gave readings higher than zero for the first time since May 2001, GfK said.

A separate survey showed Italian business confidence rose to its highest in more than 3 1/2 years as increased orders boosted expectations for production.



To contact the reporter on this story:Joshua Krongold in New York at at [email protected];Michael McDonald in New York at [email protected].

Last Updated: January 27, 2006 17:09 EST

The dollar weakened immediately after the GDP announcement
because the number was worse than expected and rallied when
the housing starts number was released because it was better
than expected. Currency pairs almost always move in the logical
direction of the announcement that is made, at least during the
intial spike, unlike with the stock market. This is especially true
if the announcement is a "suprise".

Thanks guys!

i think you are spot on. the dollar should have weakened from the poor GDP number for exactly the reason you state. but as mmills4x pointed out, the market cares more about the housing situation than the economic growth. if you look at the first post in my journal, youll see i too am a believer that the housing boom is the driving force behind the rate hikes. the fed wants to cool housing, and it seems like they will sacrafice a slowing economy to achieve that. i, for one, am getting tired of the housing story. i think it's old news. bernanke has bigger fish to fry, housing is and will continue to take care of itself. i have absolutely no view on the dollar right now. i think we will be range bound around 1.2000 for quite a while longer.

I think GDP is more important than New home sales, furthermore we had huge divergence from expected number (1.1% vs 2.8%). But market is full of impulse traders as it seems first dollar collapsed but then rallied.

I am happy that I beware

I think the most powerful fundamental data will always be interest rate differential, because if traders can simply decline trade balance or NFP they can do nothing with rate differential because it influences on their open positions.

there is talk about the numbers indicating a "bottom" of the 16 month long recession

The dollar rallies because US assets (treasuries) are perceived as a safe haven for investments right now. Even though the US GDP comes out bad (as opposed to that of other countries), the rest of the world catches a cold when the US sneezes (the US is the largest source of demand for goods and services in the world).

As far as predictions that we've reached the bottom, everybody (especially in the media) has an opinion, and it is not until everybody has the same opinion that the opinions become useful to trade upon. This is because the majority is by definition of market dynamics, wrong at points of extreme opinion in the market.

All the best in your trading,

Kris Matthews

Rule #1 in Forex:

Don't use logic and forex in the same sentence!

I guess it is NOT a dollar rally afterall. That's why they said in trading you can't depend on just technical or fundamental alone. You need to be aware of both.

...and also of the games they play behind the scene...

... and the game is: whatever can be done to the price by the brokers, banks, funds, big traders, etc. that will make the market move the most. That makes them the most money. Logic be damned.

One of my favorites is when they take the herd up the mountain and shove'em over the cliff...!

...And off the cliff they go...