Reply #20: dollar watch [View All]

[UpInArms]

http://quotes.ino.com/chart/?s=NYBOT_DX&v=i

Last trade 72.880 Change +0.292 (+0.40%)

Euro Tumbles as Markets Reassess Post -FOMC Reaction

http://www.dailyfx.com/story/bio2/Euro_Tumbles_as_Markets_Reassess_1209635060887.html

As most of the world celebrates Labor day the global economic calendar remains barren until the North American session. The euro however, was weak throughout the night as traders reconsidered the initial post FOMC reaction which took the pair for a 100 point upward ride. Although US monetary officials did not explicitly state that they were going to end the easing cycle, the FOMC statement did hint that the committee may be changing its bias from dovish to neutral.

The long term implication of such a shift in policy should favor the dollar, as markets begin to appreciate the fact that most of the monetary adjustment by the Fed has already been made. With most of the rate cuts behind us, the greenback, which has been battered relentlessly due to unfavorable interest rate differentials, may now find some reason to rally.

The euro was also pushed lower by a relatively upbeat Financial Stability Report from BoE that stated that the worst of the credit crisis may be over. Taken together with yesterday’s better than expected US GDP data, this analysis suggests that the US economy may be simply in the midst of a slowdown rather than the full blown recession and if that were the case the dollar may see further strength as traders reassess their doomsday assumptions.

Meanwhile in the UK Manufacturing PMI rose to 51 from 50.8 expected remaining above the 50 boom/bust line for the time being. Growth did slow from the month prior as new orders declined, but businesses continued expand overall. Cable did very little against the dollar, but gained significantly against the euro with EURGBP coming to within 5 points of the 7800 figure during London trade. Part of the strength in the cross was attributed to M&A flows as EDF readies 9 Billion pound acquisition of British energy.

In the US all eyes will turn to tomorrow’s NFP report, but ahead of it, the markets will scrutinize the ISM Manufacturing data due at 14:00 GMT today. Consensus calls for a slightly lower figure, but given the positive read from the Chicago PMI data yesterday, an upside surprise is possible. If the ISM report prints better than 49.0 the 1.5500 level in EURUSD is likely to give way as dollar bulls continue to press the theme that the US economy is in a mere slowdown rather than a full scale recession.

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For Dollar Bulls, the Federal Reserve Fails to Deliver

http://www.dailyfx.com/story/bio1/For_Dollar_Bulls__the_Federal_1209592796322.html

The Federal Reserve cut interest rates by 25bp to 2 percent, which was right in line with the market’s expectations. However the US dollar sold off because the market was disappointed that the central bank did not give them more. This appears to be a classic buy the rumor sell the news type of reaction in the greenback since the statement was undoubtedly more hawkish than the one released in March. We noticed 3 major changes in the statement; First, two members voted to keep interest rates unchanged. Although Plosser and Fisher dissented last month as well by favoring a smaller rate cut than the 75bp of easing delivered on March 18th, they could soon convince some of their peers to follow suit. Secondly, the Fed took out their promise to act in a “timely manner” and instead, they simply said that they will act as needed. The statement about the downside risks to growth is also gone and even though we do not believe that the downside risks to growth have really disappeared, taking these words out of the statement is symbolic. Finally, the Fed reminded the markets that they have eased interest rates substantially (325bp since August) and over time, their efforts should have an impact on the US economy. For all intents and purposes, the Federal Reserve is telling the markets that the economy needs time to absorb their rate cuts and their toned down statement suggests that they will not be cutting interest rates again in June. The futures market is currently pricing in a 78 percent chance that interest rates will remain unchanged at the next Fed meeting and a 73 percent chance that interest rates will also remain at 2 percent in August. Yet the US dollar sold off because the market is not confident in the Fed’s judgment. This morning’s Chicago PMI report and GDP reports were better than expected, but non-farm payrolls on Friday should be weak. So far, the central bank’s rate cuts have only had a limited impact on the US economy. It takes time before the monetary stimulus can be felt, but if it does not come through soon, an accelerated deterioration in the US economy could force the Federal Reserve to pick up where they left off. The FOMC statements have become longer and longer in recent months and the central bank’s increasing need to explain themselves can be worrisome for dollar bulls. A number of US economic data are due for release tomorrow. Manufacturing numbers should be dollar positive.

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