Dollar Rallies & Oil Falls

Exhaustion is finally starting to weigh on the market’s July rally. Investors are absorbing the June durable goods order, a surprising oil inventory report, big news on a Microsoft/Yahoo! alliance, and a steady stream of earnings reports. Most sector indices are trading lower with banks, defense, biotech and healthcare the only bright spots still in positive territory today.

Here is a chart of the EUR/USD which is showing the dollar making very strong gains after hitting major FOREX resistance a day earlier.

Back in the states investors were mulling over the June durable goods order. This measure of big-ticket items caused a stir when the headline number dropped 2.5%, the biggest decline since January’s drop when the report fell 7.8%. Economists were only expecting a 0.6% decline. The sudden drop sparked fears that the economic recovery was already in jeopardy. Yet drilling down deeper into the report the pull back was fueled by huge declines in aircraft demand. Aircraft and autos make up the transportation sector, which tends to be more volatile. Excluding the transports the durable goods order actually came in at a positive +1.1% in June, which was better than economists’ +0.0% forecast for durable goods without the transports. The market will get another look at the economy with the Federal Reserve’s Beige Book report due out later this afternoon.

Another surprise today was the weekly oil inventory numbers. Economists were forecasting a drop of 1.5 million barrels. Imagine the shock when the Energy Department reported a surge of 5.15 million barrels instead. Demand continues to be soft and with inventories on the rise it does not paint a very bullish picture for oil. Crude oil futures are plunging more than 5% to under $63.85 a barrel. Further exacerbating the move is a sharp rally in the U.S. dollar. The dollar strength is pushing gold, copper and the rest of the commodity sector lower.