Global Economic Environment Still Rocky

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The U.S. dollar is consolidating its earlier gains. The New Zealand rate cut got the ball rolling, and Japan followed with news of its first decline in exports, an important source of growth, in nearly five years. The eurozone reported weaker-than-expected flash PMI reports, and Germany's IFO crashed to three-year lows. The U.K. did its part by reporting its largest drop in retail sales in at least 22 years. Cross-rate activity is helping underpin the yen and Swiss franc.

The general tone of the dollar has improved in recent sessions, helped by the decline in oil prices, hawkish Fed comments, greater confidence that U.S. officials will not permit the demise of Fannie Mae (FNM) or Freddie Mac (FRE) and another round of bank earnings without major casualties.

Poor data from Japan and Europe helped extend the dollar's gains, but its momentum ended abruptly after the euro, for example, fell through its 100-day moving average at $1.5655 today and snapped back. The price action today is like a boxer hitting his opponent with a fully extended arm. There is talk of a bid coming from sovereign wealth funds. Valuation of currencies is notoriously difficult, and as proxy, it is often thought about as a function of price and time. The euro has traded below its 100-day moving average about 10 days this year before today, and each time it has provided a buying opportunity. Yet the economic news stream and shifting views of the trajectory of monetary policy suggest the need to tread carefully.

The flash eurozone PMI reports warn that the region's economic weakness probably deepened in the second quarter. Yes, this is only a preliminary report for July, but forward-looking components like new orders and confidence measures were weak, and both continued to move further below the 50 boom/bust level. The manufacturing reading fell to 47.5 from 49.2, compared to the consensus forecast of 48.7. The services PMI fell to 48.3 from 49.1 amid expectations for a 48.8 reading.