Traders sold the greenback after key economic data reinforced the current dilemma facing the US Federal Reserve. The dollar slipped past the 1.49-level against the euro and relinquished the 0.93-mark versus the Aussie. Persistent fears of the faltering US economy continue to plague the currency with the dollar hitting a fresh all-time low against the euro.

The data released today bode poorly for the economy and highlight the bind the FOMC is in - with deteriorating fundamentals and lingering inflationary pressure. The Conference Board’s index of consumer confidence plunged to its lowest level since March 2003, falling to 75 in February, sharply lower than estimates for a decline to 82 from 87.9 a month earlier. The expectations for the next 6-months also dropped to its lowest level since 1991 at 57.9 versus 69.3 from the previous month. The present conditions component fell to 100.6 versus 114.3 from January. On the other side of the coin, inflation data revealed that price pressures continue to be a persistent problem plaguing the Fed - as PPI spiked to 7.4% in January versus 6.3% a year earlier and jumping by 1.0% compared with a 0.3% drop in December. The core PPI figures did not fare much better, excluding food and energy, producer prices edged up by 0.4% m/m and 2.3% y/y.

Markets will continue to focus on US data releases this week with further scope for dollar weakness given the vulnerability for additional deterioration in fundamentals. Wednesday will see the releases of durable goods orders, new home sales, as well as Fed Chairman Bernanke’s semi-annual Congressional testimony. The January durable goods orders are forecasted to post a sharp 4.0% drop versus a 5% increase previously. New home sales in January are seen slipping slightly to 600k units, down from 604k units a month earlier.

Given recent upticks in inflation data, it will be interesting to see how Fed Chairman Bernanke addresses stagflationary fears. While we expect the FOMC to continue easing policy, specifically with another 50-basis point rate cut to 2.5% in March, lingering inflationary pressures may impede on how much room the Fed has to stimulate the economy. Bernanke’s testimony tomorrow morning will be closely scrutinized for any shift in rhetoric on the Fed’s pledge to prop up the economy.

Fed Vice Chairman Kohn reiterated that growth risks are a greater threat at the moment, adding that he does not expect the elevated inflation rates to persist. Kohn said that the recent inflation reports were disappointing but expectations remain reasonably well anchored.

  • Euro Rallies to Fresh All-Time High

The euro eked out a record high against the dollar at 1.4982 on a combination of better than expected Eurozone economic data and a renewed bout of soft US reports.

An upbeat set of economic data from Germany tempered market expectations that the ECB will soon cut rates. Germany’s economy expanded by 0.7% in Q4, up from 0.3% in the previous quarter and by 2.4% versus 1.6% a year earlier. Additionally, the Ifo sentiment survey beat out calls for a decline, unexpectedly improving in February. The current conditions survey jumped to 110.3, from 107.9 previously, while the business climate component improved to 104.1, from 103.4. However, the Ifo expectations component slipped to 98.2, from 99.0.