Bonds Fall, Dollar Surges on Housing Data

U.S. 10-year Treasury bonds fell today, after
previously owned home sales rose much more than expected last month. The
FOMC announced this week that rates would remain the same, and removed key
hawkish wording, which led to investor speculation that the Fed would cut rates
soon. Major strength in the housing sector from this report helped to send
bond prices lower, as traders sold bonds in favor of strength in riskier assets.
Bonds usually rise on economic weakness and fall on strength, so it is safe to
say that traders took the unexpectedly positive housing report as a major
positive for the economy. A weak housing sector contributed to an economic
slowdown in the U.S. over the second half of 2006, and traders have been focused
on all housing reports for signs of continued weakness or a rebound.
Today’s report did much to boost overall U.S. economic sentiment.

The dollar rose against the euro, but fell
fractionally against the yen, after a U.S. housing report came out much stronger
than expected. Traders have been focusing on the key housing reports for
some time now, and today’s unexpected numbers helped to boost the dollar, and
pare losses versus the yen. The yen has been a major focus lately, after
rebounding strongly from record lows against the euro on a global equities
slide. The international currency market has favored currencies backed by
strong, positive-growth economies, which Europe has proven itself to be.
Both Japan and the U.S. need to produce strong economic numbers to necessitate
future rate hikes, and the U.S. housing report today was a step in the right
direction for the dollar.

Crude oil rose nearly 1%, on geopolitical
tensions stemming from Iran. Tensions in the Middle East have risen since
Iran seized 15 British armed servicemen, who were conducting military operations
in the Persian Gulf. Iranian-linked geopolitical tensions helped to drive
the price of crude oil to record highs last summer, when crude reached about $80
a barrel. Crude fell over 30% from those record highs before bouncing on
cold weather and supply issues. Natural gas fell about 0.6% on more signs
of warm weather, and speculation of less demand.

Gold fell 1% today as the dollar rallied on
home-sales numbers. Gold usually moves inversely to the dollar and with
oil, and it was dollar action that dominated today’s gold trading.
Investors dumped gold in favor of a strong dollar, which was boosted by
unexpected, strong previously owned home sales last month. Copper rose
fractionally, but gained on the week, on increased demand from China.

Grains fell across the board today.
Soybeans were down fractionally, corn fell about 1.4% and wheat fell just over


home sales jumped 3.9% last month.

John Lee

Associate Editor