Dollar's Fall Could Be Limited as Fed Signals Rate Pause

The Fed has given us a bleak prognosis of the US economy as can be seen from the minutes of the FOMC meeting on April 29/30. Here are some downbeat forecasts: the Fed cut its forecast for economic growth to 0.3% - 1.2% in 2008, a far cry from its earlier projection of 1.3% - 2%. Not only that, Bernanke and colleagues expect the unemployment rate “to pick up further this year and to remain elevated in 2009″.

According to the minutes, the decision to cut interest rates by 25 basis points was “a close call”, with some Fed officials noting that it wouldn’t be appropriate to cut interest rates further even if data suggested “that the economy was slowing further or even contracting slightly in the near term, unless economic and financial developments indicated a significant weakening of the economic outlook”.

The text suggests that the Fed is definitely going to keep interest rates unchanged at its next meeting in June, especially since record oil prices are putting pressure on the inflation outlook. Futures on the Chicago Board of Trade show there is now a 90% chance the Fed will keep rates unchanged, compared to 88% Wednesday.

What will this mean for the US dollar? With oil prices rising to new record highs almost every day, the US dollar is likely to stay suppressed, but the knowledge that the Fed is going to keep rates on hold could possibly limit the dollar’s fall, though not enough to halt it.

UK Retail Sales

UK retail sales fell for a second month in, April, dropping by 0.2%, less than the 0.5% drop expected. Compared to a year ago, sales increased 4.2%, which is a pretty strong gain amid falling property prices. Shoppers are buying more video games such as Grand Theft Auto IV and Wii Fit, causing sales in the “other stores” category to increase by 5.3% in the quarter through April, the most since the survey began in 1986.

Forex Trading

EUR/USD rose to a high of 1.5815, and its short-term bull target is possibly around 1.5850-60. USD/CHF did fall below 1.0275 to 1.0230, an expected bear target, but then bounced 80 pips from there to 1.0310. Nearest resistance is around 1.0390-1.0400. As long as USD/CHF stays above 1.0200-10, it is temporarily safe from more downside pressure. GBP/USD finally broke above a 2-month-old down trendline to surge above 1.9700 to a session high of 1.9850. In the short-term, 2.0000 could be its upside target once more.

Friday:

Swiss trade balance 0615 GMT

UK GDP 0830 GMT

Italy GDP 0900 GMT

US existing home sales 1400 GMT

Comments

[User 143167:]

It is more about the deficit. Check out the dollar index when the Fed hiked rates in 2004.

2008 May 22 11:56 AM

[Bo Peng:]

One word: dollar carry trade.

2008 May 22 05:21 PM

[Robespierre:]

So lets see:
Inflation higher than the FED rate
Deficits from here to the moon
unemployment higher than they are telling you

Why do I want US $$$$ again ?

2008 May 22 05:42 PM

[rainman:]

It is hard to quantify, will the a rate pause hold the biggest lie in the world, e.g: the dollar.

In the past years, thanks to A.G, this currency had been printed like free, and many of them are stored in the China's foreign reserve system.

2008 May 22 07:58 PM

[rainman:]

You see, the Americans dragged the Europeans into their own sub prime crisis via REIT alike securities, the next bomb is the dollars in Chinese hands.

The best approach is carrying your trade by bypassing the dollars, such as the Lonnie vs. Australian dollars.

2008 May 22 08:00 PM

[MNSL:]

I think US Dollar will bounce back soon. Government will try to control inflation.

2008 May 23 02:50 PM

[flow5:]

The exchange value of the dollar, and it's accompanying trade deficit, fuels the superfluous and prudential E-dollar market...it is inevitable, the E-dollar market will collapse which will bring down dollar denominated assets, and the Federal Deficit & the U.S. dollar will be repudiated.

2008 May 23 03:27 PM

[flow5:]

Say what? Who's going to stop it?

2008 May 23 03:28 PM