Week in Review: Dollar's Biggest Advance Vs. Euro in 3 Years

It was Friday the 13th yesterday, but the US currency wasn’t at all spooked. While the US stock markets closed the week almost flat (Dow up 0.8%; S&P 500 down 0.05%), the US dollar had a roaring good time in the currency markets. The US dollar just clinched the biggest weekly gain against the Euro since 2005 and the biggest weekly rise against the Japanese yen since December 2004.

You could say that Bernanke’s speech on Tuesday initiated the strong turnaround in USD sentiment; he said that US economic risks have diminished and he’s paying attention to the weak dollar. Increasingly over the past few months, a weaker dollar seems to be negatively correlated with oil prices although whether a causal relationship exists between these two is another issue altogether. Many, including the US Federal Reserve, are worried that the dollar’s weakness has come to a point whereby its benefits are being outweighed by the negative ramifications in the current economic situation. Dollar weakness ain’t that sexy anymore.

For traders who are counting on a July rate hike from the ECB to boost the Euro in a sustained way, they may have to look elsewhere, for Trichet and other ECB members have said last week the market shouldn’t be expecting a series of increases from them. July’s hike could be a one-time event.

Canada and France For Stronger Dollar

Finance minsters from the Group of Eight nations have gathered for the G8 meeting on Saturday. France’s finance minister Christine Lagarde said, “The strengthening of the dollar seems very satisfying to me.” Canada’s finance minister Jim Flaherty is also on the side favoring a strong US dollar. He said that strong US currency “can help on the inflationary side because of the difference it makes with a low US dollar in terms of oil prices.”

Could Greenspan’s Words Inspire More Gains In USD?

Former Fed chairman Greenspan said Friday via satellite today to a conference in Mexico City that the financial markets have shown a “pronounced turnaround”‘ since March when Bear Stearns was rescued from collapse. He also said “there is a reduced possibility of a large, intense recession”, and that the Fed will have to put “increasing pressure on the money supply and reserves” to combat inflation, and “as a result you will see interest rates rising”.

Forex Trading

Last week’s pip tally for the four major currency pairs:

EUR/USD - fall of 540 pips

USD/CHF - gain of 400 pips

USD/JPY - gain of 400 pips

GBP/USD - fall of 400 pips

EUR/USD’s nearest support is around 1.5280, and if the pair breaks successfully below that area, more bearishness could ensue. USD/CHF’s upside targets are possibly around 1.0560, 1.0590-1.0600. Nothing’s for certain in the markets, so keep on top of economic releases as always, and watch the charts.

Comments

[Will Rahal:]

I believe the US Dollar is to be bought despite
the week economic numbers reported recently.

Nevertheless, the boost in retail sales caused by the rebate, is insignificant.

2008 Jun 14 09:59 AM

[sickofthehype:]

This was all planned out anyhow. Shocker.

2008 Jun 14 10:26 AM

[PIA:]

Despite human nature wishing it could intervene for its own short-term convenience, free markets have best brought supply and demand into equilibrium through the pricing mechanism.

Central bankers and politicians should re-learn their Economics and History lessons. Their interferences, misallocations and excessive regulation have historically "aggravated" the problems they yearn to fix quickly.

Reagan's courageous re-appointment of Paul Volcker at the Federal Reserve in 1983 and his appointment of Greenspan in 1987 just prior to the October 1987 market decline are wonderful examples of enlightened and disciplined political appointments serving the nation's "long-term" interest at the political expense of "immediate criticism" from short-term and interventionist pundits.

If only Senator Obama could heed and learn from such lessons should he attain the main lever of political appointment power. Obama's proposals to nearly double the capital gains tax rate, eliminate qualified dividend tax rates, and repeal the 2003 reduction of tax rates on ordinary incomes will actually "harm" employment, incomes and savings at the very time of a slowing economy.
Unfortunately Obama's policy proposals are what one would expect from his resume of accomplished 'redistribution of incomes', 'no private sector work experience', 'no savings experience' and 'never governing any city or state'.

May SUBSTANCE prevail over FORM and RHETORIC this November.

2008 Jun 14 11:42 AM

[Jakester:]

If one buys the premise that the dollar will continue to gain on the Euro, perhaps the best way to play this is using DRR which is the double inverse Euro ETF. It aims to go up 2x the fall of the Euro vs the dollar. I have been using it for a couple of weeks and it seems to obtain this correlation fairly well. It's only a month old, but hit a new high yesterday.

2008 Jun 14 01:44 PM

[SW Richmond:]

If you're a trader, watch the charts. Otherwise, watch the fundamentals. Someone tell me what weapon Bernanke has to control inflation other than his mouth. Raising interest rates an amount significant enough to combat real inflation will kill off what is left of the home prices. Someone explain to me where the money will come from to keep the banks intact / solvent (if "solvent" is what you can call them now) if the house price crash isn't stopped soon. Where will the money come from for the Alt-A version of subprime? A quarter point move is symbolic only and the effect would be short-lived. Bernanke is trapped. Someone please explain why he isn't.

These aren't rhetorical questions, I'd really like someone to answer.

2008 Jun 14 02:54 PM

[sorgmot:]

No government in human history has ever survived over a few hundred years.

Rome had the best location and still fell apart.

Governors are driven by greed.

Greed causes monopolies and cartels to be supported by governments.

As Adam Smith and David Hume pointed out these actions impoverish the nation and all but a few of its citizens.

As the wealth of the general citizens falls due to actions of politics, they dwindle in number and leave.

The end of the nation is implosion and financial collapse.

Other nations take over.

2008 Jun 14 03:45 PM

[MNSL:]

I think next 12 month US dollar will appreciate against currencies such as NZD, EURO, POUND, YEN and AUD. Fed will increase interest rate as well to control inflation and rising prices of commodities to safeguard industries.

2008 Jun 14 04:00 PM

[CLH:]

Grace---The Euro seems to be headed down. They had their day and now its the US. Europe because of socialism cant cut the mustard. They will have to lower interest rates. Ireland is the only country in Europe that has capitalism and they have just told Europe---no go. Europe will now sit around and talk but accomplish nothing.

2008 Jun 14 05:11 PM

[DRumsfeld:]

The only post here which shows someone with economic knowlege is SWRichmond.

Look at this:- patrick.net/housing/co...

Bernanke is talking the talk but he will not walk the walk. The markets in the short term will let the Dollar rise as they want to trade and make money. But in the Autumn they will test his resolve and he will not be able to raise interest rates enough without killing the financial and housing markets.

Bernanke has stated that he will do everything to prevent deflation. Raising interest by more than 0.25%(very unlikely) is not going to happen. The Dollar is going to fall a lot lot further. As for oil, this will continue to rise. Who is going to win -the markets or the Fed: no contest, the markets.

2008 Jun 15 01:40 AM

[Martin Lowe...:]

This is just the beginiing. I have been prediciting this for months. See it all at www.lompie.blogspot.co...

2008 Jun 15 09:13 AM

[macimages:]

For us uneducated outsiders, what's a "pip"

2008 Jun 15 02:40 PM

[Reinko:]

Oh Grace your articles are always a feast for the eye:

Bernanke suddenly sees no economical downturn any longer and points to the inflationary dangers of a low US$.
In fact when we are supposed to believe the inflation reports, in Europe and the USA they are about the same size of about 4% yoy right now.

And we have a rather strong currency...

But when you, just like me, digg a bit deeper in the wonderful world of US financial stuff you can calculate that from the top of 2006 US family home equity will get a ram of over 10 trillion.

Since Bernanke, just like me, is an academic; he too is capable of making such easy to understand macro calculations. That leaves you wonder why Bernanke tells crap like this?

Very simple: Because everbode wants to hear that kind of crap.

Yet rather likely the law of gravity will also apply to US housing value (let alone commercial real estate) so a few more trillion of home equity will fade away and it is hard to see economical recovery under such conditions...

2008 Jun 15 04:52 PM

[Reinko:]

Correction: It must be 'everybody' instead of 'everybode'.

2008 Jun 15 04:54 PM