Dollar Up on Consumer Retraction

Retail sales fell 0.4% in April after their 1.3% dip in March, dashing hopes of any foreseeable economic recovery. This sent the stock markets plunging, led by a fall in retail stocks and investors turned risk averse again and ran to the safety of the dollar. The result was an appreciation in the US dollar and the Yen also seems to have made some gains from the unexpected risk aversion.

Retail sales had increased in January and February this year after a continuous fall between July and December 2008. While, the month of March experienced negative growth in retail sales, April was expected to be better. US retail sales are a key indicator of US economic health as 70% of the nation’s gross domestic product (GDP) is comprised of consumer spending. While, retail sales fell in April, the pace of decline was lower than that of the previous month and this could be interpreted to be an indicator of recovery. However, this may be a premature assumption to make and only time will tell if these were indeed signs of recovery. What was also disturbing was the trend of inventories. As per the Commerce Department, inventories fell 1% in March. This was a fall for seven consecutive months. What is expected to hurt this trend further is dampened consumer spending. With consumer spending refusing to grow, and continuing to shrink, inventories would need to be pared further. This would imply that production orders would be postponed and lack of production activity would dent GDP growth. With the recession having put nearly 5.7 million Americans out of work, this trend does not bode well, as increase in consumption is highly dependent upon an increase in employment.

The stock markets pared earlier gains on this news, with the Dow Jones shedding 2.2% and the S&P 500 stock index falling 2.7%. Surprisingly, the technology dominated NASDAQ lost the most and was down 3%. Stocks of major retailers tumbled, with that of Liz Claiborne falling 20% and that of Macy’s 6.6%. The S&P Retail Index fell 2.1%.

The unexpected fall in retail sales that resulted in stock markets moving down, seems to have led investors to rethink if stocks had moved up too fast. An exit from stocks also seems to be pushing up the dollar, with the onset of risk aversion. While, the dollar gained against the Euro, it was down against the Yen. This seems to indicate that the Yen may be making a comeback as a hedge currency in times of uncertainty. If the Yen were to continue the trend of rising against the US dollar due to risk aversion, this may be indicative of a disturbing trend. The continuation of this trend effectively indicates that the currency markets are saying that in bad times, they now prefer the Yen a safer haven than the US dollar, as the future of the US economy is looking grim and they are not willing to bet on it for the long term safety of their money.