Dollar Edges Higher After Consumer Confidence Defies Expectations

American household optimism has defied expectations for a third consecutive month, rising in August, despite multiple headwinds.

US consumer confidence defied expectations for the third month running in August, according to the Conference Board survey, helping the dollar to pare losses in noon trading Tuesday.

The closely watched measure of household optimism posted a reading of 122.9 for August, up from a 17 year high of 121.1 in July, defying the consensus projection among economists for a fall to 120.3.

“Consumer confidence increased in August following a moderate improvement in July,” said Lynn Franco, director of economic indicators at Conference Board. “Consumer confidence increased in August following a moderate improvement in July.”

The pound to US dollar exchange rate edged lower by a fraction to 1.2940 in the immediate aftermath of the release, checking an earlier advance by the British currency.

Relative to the Japanese yen, the greenback held onto 20 points worth of gains it had racked up in the half-hour before the number’s release, leaving the exchange rate at 108.72.

“Readings on the labour market continue to remain firm, with respondents suggesting that both jobs and incomes rose during the month, possibly a positive harbinger for the payroll release on Friday,” says Royce Mendes, an economist at CIBC.

It is noteworthy that consensus has projected a fall in the index for each of the two prior releases, only for the barometer of household optimism to have risen in the face of scepticism.

The US dollar has been in freefall during recent days thanks to moderating expectations around the likely pace of Fed rate hikes as well as renewed belligerence from North Korea.

Economists had foreseen a contraction in August given political dysfunction in Washington, which has so far hampered the Trump administration’s legislative and economic agenda.

“The USD is under broad pressure, weakening in response to a renewed moderation in Fed hike expectations (top chart), however the distribution of relative returns among the G10 currencies is showing demand for havens JPY and CHF along with relative underperformance for AUD, CAD and NZD. U.S,” says Shaun Osborne, chief FX strategist at Scotiabank.

In addition to concerns over the prospect of a slower pace of interest rate hikes, the dollar has faced other headwinds during the Tuesday session.

It was broadly weak from the outset, in response to Hurricane Harvey having decimated swathes of America’s fourth largest state by economic output, and following the latest missile test from North Korea.

Overnight reports that North Korea has test fired a missile that travelled through Japanese airspace and over the mainland now threatens to reignite tensions between the US and the isolated Asia Pacific nation.

“The missile launch undermines hopes for dialogue with North Korea following a period where tensions appeared to have cooled,” says Andreas Johnson, a strategist at SEB Bank.

The move threatens to escalate an earlier war of words between the United States, Japan’s closest ally, and North Korea, which saw President Donald Trump direct multiple threats at the Asian Pacific country.

Likely damage from Hurricane Harvey is thought to be of a lesser scale than that wrought on the states by Hurricane Sandy in 2012 and Hurricane Katrina in 2005.

“Harvey will have little effect on aggregate US GDP but will cause a short-term blow regionally,” says Johnson at SEB.