Reply #7: dollar watch [View All]

[UpInArms]

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What Drove the US Dollar to a Record Low?

http://www.dailyfx.com/story/bio1/What_Drove_the_US_Dollar_1204064033278.html

It has been a record breaking day in the financial markets with the US dollar falling to an all-time low against the Euro and crude oil futures closing at a record high. Although US Consumer confidence dropped to a 5 year low, that was not the primary catalyst for the dollar’s slide. Instead, the downward spiral was triggered by the combination of things including comments from Federal Reserve President Kohn, stops being taken out at the prior high, weaker consumer confidence, stronger Eurozone economic data and concerns about what Ben Bernanke will say at his testimony on monetary policy tomorrow. Kohn has already warned us that the central bank will do what it takes to fight a recession. With foreclosures rising 90 percent in the month of January from the same period last year, consumer confidence tanking and oil prices hitting new highs, it is absolutely necessary that Ben Bernanke makes growth his top priority. We doubt that the Senate our House panels will allow him to get away with talking about price pressure when most of their constituents probably feel like the US economy is already in a recession. Therefore even though the annualized pace of producer price growth rose was the fastest pace since 1981, the impact on the US dollar was limited because the market quickly realized that right now, stronger inflationary pressures will not stop the Fed from continuing to lower interest rates. The futures market is still pricing in a 50bp rate cut for the March 18th monetary policy meeting and recent economic data suggests that the US central bank cannot afford to slow down. The price action in the US dollar today clearly indicates that this is what the market expects Bernanke to tell us tomorrow. New home sales and Durable Goods orders are also due for release. Existing home sales were stronger than expected, but new home sales should remain soft and even if it rebounds, it will not help the dollar much because either inventory will rise or prices will fall, or both. As for durable goods, after increasing 5.2 percent in the month of January due to non-defense aircraft sales, a healthy decline is expected.

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Euro Breaks Mythical 1.50 as Dollar Takes a Beating, Will Bernanke Deal The Final Blow?

http://www.dailyfx.com/story/bio2/Euro_Breaks_Mythical_1_50_as_1204110343996.html

Euro broke through the mythical 1.50 barrier as the dollar sold off throughout the overnight session after U.S. economic data and comments from Fed Vice chairman Donald Kohn, suggested that more rate cuts are forthcoming from the Fed. The European economic data that crossed the wires only strengthened the case for euro bulls as European money supply was stronger than expected at 11.5%, German import prices index rose 0.8% in January, and GfK consumer confidence printed unchanged at 4.5.

The European economy continues to show signs of decoupling as the money supply numbers suggests that the credit crunch isn’t affecting lending in the region as it has in the U.S. Also look for the ECB to continue their hawkish stance, as their inflation case was bolstered by rising German import prices and as consumer confidence showed signs of stabilizing. Now that the Euro has broken through the 1.50 barrier, the currency could continue to set new record highs as expectations are that interest rate differentials will continue to widen between the U.S and the Eurozone.

Fed Chairman Ben Bernanke is expected to reiterate Donald Kohn dovish sentiments when he speaks today, as economic data continues to signal that more work is needed to be done by the Fed. In contrast President Trichet recently reiterated his hawkish stance when speaking in Frankfurt, when he intimated that strong Asian demand will offset declines from the U.S.

U.K. GDP signaled that they have more in common with the U.S. than their European brethren as the economy grew at its slowest rate in more than a year as the credit crunch takes a toll on consumer spending. Rumors that a U.K. clearer was having trouble raising funds led to a selloff of the pound and rumors that an emergency rate cut by the BoE may be in store.

With durable goods and new home sales expected to print lower, Euro longs will make a strong case. However, the real event risk will come from Fed Chairman Bernanke’s report on the economy. Any signal that inflation, and for that matter, stagflation, is a major concern for the Federal Open Market Committee may lead to the dollar rebounding, as traders look to lock in profits.

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