Euro vs. Dollar: When Mood Trumps Reason

Sometimes, all forex markets need is an excuse:

By Vadim Pokhlebkin

How will the Indian Markets behave on Monday?? Do u know......

"Depressed sentiment is usually good support for rallies."

On July 29, the U.S. dollar gained strongly against the euro, sending the EURUSD exchange rate down some 200 pips, or two full cents. But if you looked at the day's news for explanations, it probably left you scratching your head:

"Home prices in 20 U.S. metropolitan areas fell at a faster pace in May, and consumer confidence stayed near the lowest level since 1992 this month, posing a threat to household spending." – July 29, Bloomberg.

"Merrill [Lynch] expects to record a write-down of $5.7 billion for the third quarter. Such an outcome… would bring its charges since the credit crisis erupted last summer to more than $45 billion." July 29, The New York Times.

I'm no economist, but news like that is supposed to make you think the U.S. dollar will fall, right? Yet it rallied. Why? Apparently, because a tiny bump in the U.S. consumer confidence, from 51 to 51.9, reduced "concern the world's largest economy may fall into a recession." (Bloomberg).

To put that 0.9 increase in perspective, look at this chart of the U.S. consumer confidence index. And don't worry if at first you don't notice that little wiggle of an uptick at the bottom of the chart: It IS hard to see it against the background of that 50-percent-plus crash in consumer confidence in less than a year. Good thing there were enough forex traders on July 29 who took that wiggle to mean the U.S. economy may avert recession, after all.

If the above explanation doesn't sound convincing to you, I agree: Forex traders were simply looking for an excuse to sell the euro on July 29. They felt bearish, and they needed something, anything, to justify their mood. Like we've said on these pages before, when traders feel bullish, they will buy, and when they feel bearish, they will sell – regardless of the news. This is just another example of how collective psychology can trump reason