The dollar fell against other key currencies Tuesday on more signs of stagflation. US producer prices soared to a 27-year high and housing starts dropped to a 17-year low, further discrediting the Federal Reserve's attempt to stimulate the economy without causing serious inflation. The yen rose as US stocks declined for a second day on worries the US economic slowdown will be prolonged and credit-market losses may deepen. The euro gained for a second day after hitting a 6-month low last week. Sterling advanced after finding some short-term support at 1.85. The Australian dollar bounced off the 0.86-area support on strength in commodity prices. All the key currencies are oversold against the greenback.

The USD/CAD fell as gold and energy prices increased and Canadian wholesale sales rose at the fastest pace in 16 months. The pair has been trading near the 1.07 resistance but unable to penetrate it the last eight days. Although having fallen from an overbought reading, the RSI still indicates an overbought condition and implies downward short-term pressures for the USD/CAD. We think the pair will consolidate gains between resistance at 1.07 and support at 1.03.

Financial and Economic News and Comments

US & Canada

The US producer price index rose a more-than-expected 1.2% m/m on a seasonally adjusted basis in July, data from the Labor Department showed. The PPI soared 9.8% y/y, the largest annual increase since June 1981. About half of the PPI monthly increase was due to energy, which rose 3.1% m/m in July and jumped 28.0% y/y. The core PPI, which excludes food and energy, increased a more-than-forecast 0.7% m/m in July and rose 3.5% y/y, a 17-year high. Intermediate goods prices rose 2.7% m/m. Core intermediate goods increased 2.0% m/m and jumped 10.2% y/y, the highest annual rise since September 1980. The Federal Reserve is expected to keep its target for the federal funds rate unchanged at 2% into next year. Unless reversed in coming months, the across-the-board PPI rise could put rate increases back on the Fed's table later this year.

US housing starts fell 11.0% m/m in July to a seasonally adjusted 965,000 annual rate, a 17-year low and close to the consensus expected 960,000 rate, following an upwardly 10.4% m/m increase in June, data from the Commerce Department showed. Housing starts dropped 29.6% y/y. Most of the decline in July housing starts was due to multiple-unit starts, which fell 23.6% m/m. Single-family starts fell 2.9% m/m in July, down 39.2% y/y. Housing starts fell 8.2% m/m in the South, 30.4% m/m in the Northeast, and 8.2% m/m in the West. Housing starts rose 10.0% m/m in the Midwest.

US building permits declined 17.7% m/m to a 937,000 annual rate in July, below the consensus expected 970,000 rate, after increasing 16.4% m/m to 1.138 million in June. Building permits dropped 32.4% y/y. Single-family permits declined 5.2% m/m in July, down 41.4% y/y. The declines in both housing starts and permits in July indicate a continued contraction in the US housing market.

Canada's wholesale sales rose a more-than-expected 2.0% m/m to C$45.2 billion ($42.4 billion) in June, the fastest pace in 16 months as the automotive industry rebounded, following a downwardly revised 1.5% m/m increase in May, according to data from Statistics Canada.

Europe

Germany's PPI accelerated to 8.9% y/y in July, more than forecast and the highest since October 1981, reinforcing speculation the European Central Bank will keep interest rates at a 7-year high despite the cooling economy, data from the Federal Statistics Office showed. The PPI rose 2.0% m/m in July. Excluding energy, the July PPI rose 0.8% m/m and 3.6% y/y.

As oil prices retreated from a record, the ZEW index of German investor and analyst expectations rose more than forecast to -55.5 in August from -63.9 in July, the lowest since the survey began in 1991, according to data from the ZEW Center for European Economic Research. Although the more-than-expected increase in the ZEW expectations index is a good sign, German investor confidence in August is still at recessionary levels.

Asia-Pacific

The Bank of Japan kept its key interest rate unchanged at 0.5%, saying it became more pessimistic about the Japanese economic outlook. "Economic growth has been sluggish against the backdrop of high energy and materials prices and weaker growth in exports," BOJ Governor Masaaki Shirakawa and his six colleagues said. World financial-market instability, the US and global slowdown, and rising commodity prices pose risks for the Japanese economy, the BOJ stated. The bank downgraded the economic assessment for a second consecutive time after saying in July that the expansion was "slowing further."

The Reserve Bank of Australia said it may cut interest rates soon to avoid a "deeper and more persistent" economic slowdown. "Indeed, less restrictive conditions could soon be called for, otherwise the risk of a deeper and more persistent slowing in the economy would increase. On these considerations, a case could be made for an early reduction in the cash rate," RBA board members said in minutes of their August 5 meeting, released today. "[G]iven the slower trend in demand, scope to move towards a less restrictive setting of monetary policy was judged to be increasing," today's minutes said.

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