Mixed Data, Position-Squaring Ahead of Fed Minutes Weaken U.S. Dollar

The U.S. Dollar fell on Monday in reaction to mixed U.S. economic news and ahead of Wednesday’s U.S. consumer inflation data and the latest Fed minutes.

The dollar weakened and the British Pound, Euro and gold markets firmed after the New York Fed said that manufacturing activity for the state fell from 3.86 in July to -14.92 in August, its lowest since April 2009. Traders were looking for a reading of 5.00.

In other news, the National Association of Home Builders index rose 1 point to 61, its highest level since November 2005.

The reports indicate that the U.S. housing market may have to carry the economy. Manufacturing is suffering because of the stronger dollar, weak growth overseas and an economy growing at only a 2% rate.

The Euro Zone trade surplus rose to a six-month high in June, as exports grew at a faster pace than imports. According to Eurostat, the Euro Zone trade surplus rose to a seasonally adjust 21.9 billion Euros in June, up 2.8% month-on-month and the highest level since December last year.

Eurostat also reported that exports rose 1.4% month-on-month in June, while imports climbed 1.2% from the previous month.

The reports triggered a weak reaction by the EUR/USD because investors were looking for a surplus of 23.1 billion Euros.

Although the GBP/USD firmed on the U.S. data, the Forex pair was under pressure most of the session on position-squaring ahead of Tuesday’s U.K. inflation data. The report is expected to show year-to-year CPI at 0.0%. PPI Input is expected to show a reading of -1.3%. PPI output, a reading of 0.1%. Core CPI is expected to show a 0.8% increase.

The weaker dollar helped support gold prices. Expectations of increased production pressure crude oil.

Overall volume and volatility were down today because of tomorrow’s major U.S. CPI report and the Fed minutes. Both events may reveal to traders whether the Fed has enough information and the votes to begin raising interest rates in September for the first time since 2006. Some traders believe that even if the economy is strong enough to support a rate hike, last week’s devaluation of the yuan may put pressure on the central bank to refrain from a rate hike at this time.

China’s move was designed to make its exports more attractive. Raising rates at this time will strengthen the U.S. Dollar which could hurt U.S. exporters.