On a trade-weighted basis, the dollar closed the week at a fresh record low. However, against some of the currency's more aggressive counterparts, the pang of doubt in risk trends helped to keep the greenback from much worse. US equity benchmarks experienced their worst selloff since February 5th after insurer and Dow component AIG reported a massive $15 billion writedown on trouble mortgage securities.
This evidence that subprime losses have spread into more mainstream insurance in turn revived fears of a sustained credit crunch and temporarily saved the dollar from further losses in all its major pairings except the positive yielding USDJPY and USDCHF. If it weren't for the inadvertent assistance from risk trends, the greenback would likely have succumbed to the session's disappointing lot of scheduled economic data. The morning brought the end of the month spending numbers for January; and the readings did little to encourage a brighter outlook for the world's largest economy. Personal income rose 0.3 percent last month to outpace expectations while still cooling from December. A false sense of bullishness from a stronger than expected 0.4 percent increase in spending was quickly snuffed out when the market realized the boost was primarily due to higher prices and not greater volume. Further complicating the issue, inflation reported by the PCE deflator accelerated to its fastest pace in over two years. Irrational fears of stagflation are looking less absurd.
The rest of the session was reserved for the Chicago Purchasing Managers Index and final U. of Michigan consumer sentiment survey, both for February. The confidence gauge was revised slightly higher, though it was unable to shake 16-year lows. Equally concerning, the Chicago manufacturing report plunged to its lowest read in 5 years. Along with Empire, Philly and Richmond Fed indexes, this Chicago report promises a very week ISM reading on Monday. For the rest of the coming week, the fourth quarter mortgage delinquencies will asses the full damage in the lending market, but the market's true interest will lie with the expected 25,000 rebound in February NFPs.
