USD Rebounds on Stock Market's Rally

Traders continue to pare their short USD positions against major currencies like the Euro, Swiss franc, Japanese yen and the British pound. Although interest rate differentials do not favor the US dollar in the medium- to long-term, the currency has managed to recover on the back of a strong rally in US stocks after the Fed cut the benchmark rate from 3% to 2.25% and signaled it won't hesitate to cut rates further should the situation arise. The greenback also got some support after better-than-forecast earnings from Morgan Stanley (MS) and as regulators for Fannie Mae (FNM) and Freddie Mac (FRE) eased capital requirements to allow them to buy more loans.

Forex Trading

After falling to 95.70 on Monday, USD/JPY has rebounded all the way to 100.50 Tuesday. Upside hurdles lie around 100.70, 101.00-30, 102.00. USD/CHF's nearest resistance is around 1.0060, then 1.0100-30. If EUR/USD breaks successfully below 1.5600, it could next target 1.5530. Note, however, that downside risks still remain for the US dollar.

Pound All Bashed Up

The Bank of England released minutes of the March 6 policy meeting Wednesday which showed that policy makers voted 7-2 to keep the benchmark interest rate at 5.25%, with John Gieve and David Blanchflower dissenting. What is also hurting the British pound sentiment is speculation that some UK banks, including HBOS, Britain's biggest mortgage lender, will report more writedowns related to subprime-mortgage investments. After HBOS stocks plunged in London trading, the company stepped out to say it has "ready access" to funding. Interestingly, UK's Financial Services Authority is now investigating whether traders have been seeking to profit by spreading "unfounded rumors" about financial stocks.

US Housing Market

According to the Mortgage Bankers Association, applications for US home mortgages fell to their lowest last week since December despite a sharp drop in long-term mortgage rates. The seasonally adjusted index of mortgage application activity fell 2.9% to 652.0 in the week ended March 14. MBA said that the average 30-year fixed mortgage rate fell 0.39 percentage point to 5.98%.