Tuesday's Currencies Wrap: Dollar Strengthens

Overall, it was a day of falling oil and commodity prices and that meant a stronger dollar pretty much across the board. As far as August's ISM factory index was concerned, "the number slipped to just below expansion, but it is in-line with what we have seen all year," said Matthew Carniol, chief currency strategist at TheLFB-forex.com. "Manufacturing is sluggish but exports, which grew from 54.0 to 57.0, continue to be supportive for the sector. With the dollar's recent gains and weak economic reports from the U.K., Euro area, Japan and other parts of Asia (including China, whose PMI contracted for a second month in a row), it may be possible that exports have peaked. Most welcome was the huge fall in the price index to 77.0 from 88.5. Employment however, continued to fall."

The Euro (Eur/Usd) declined but found support at a monthly trend line extending from March 2006. An economic release showed the manufacturing side of the economy contracted in the Euro-area for a third month in a row, reflecting the weak state the economy. Later this week, the ECB will announce its interest rate decision.

The Pound (Gbp/Usd) declined 150 pips during the overnight session. On Monday, the Bank of England said that in July just 33,000 mortgages were approved, the fewest since at least 1999. The BoE also said the value of home loans rose 2.87% to 3.23 billion pounds in July from June but that in the year to July, the value of homes loans decreased 65.45%, when the value of home loans stood at 9.35 billion pounds. The Chartered Institute of Purchasing and Supply's manufacturing index came in at 45.9 in August, the fourth consecutive month of contraction, after being 44.1 in July, the lowest since December 1998. Hometrack reported that home prices in England and Wales declined 5.3% from a year ago.

The Aussie (Aud/Usd) declined to its lowest level since September 2007 after the RBA reduced borrowing costs by 25 basis points to 7.00%. "Weighing up the available domestic and international information, the board judged that there was now scope for monetary policy to become less restrictive,'' RBA governor Glenn Stevens said in a statement. Second quarter GDP will be released at 21:30 EDT.

The Cad (Usd/Cad) rose as oil declined in overnight trading, then traded relatively flat during the New York session. The BoC will be making their interest rate decision tomorrow morning at 09:00 EDT.

The Swissy (Usd/Chf) rose as U.S. equity futures markets advanced strongly in overnight trading, then faded once stocks turned negative in the afternoon. 

The Yen (Usd/Yen) moved much as the swissy did, rising with S&P futures and then falling once markets turned negative in the afternoon. Equities may fall out of favor going forward as traders start pricing in a U.S. slowdown in the second half of the year.

Comments

[camquin:]

The dollar's rally is completely contingent on other currencies. In order for the dollar to continue, other Federal Banks will have to cut rates. If they don't, we will see the inevitable sooner: The dollar, a fiat currency, is on its way out.

Citizens and the government alike have overspent and overborrowed...
www.greenfaucet.com/th...

We need to stop the irresponsibility in Washington and in our own homes.

2008 Sep 02 08:36 PM

[Coelacanth:]

The yen is an interesting case.

Prime Minister Fukuda surprised everyone by stepping down yesterday. One of his possible successors,Taro Aso, isn't a reformer but rather thought of as someone who might take Japan back to it's big state spending ways.

On the surface this would appear to be hugely yen negative. In the short to medium term I have to weigh that against how much worse off some other majors are. In particular I favor yen over euro.

2008 Sep 02 10:27 PM

[Matt from Q...:]

One of our central ideas for dollar strength has to do with real interest rates, which are negative in the U.S. and positive in Europe. When economies are shrinking, positive real interest rates need to be lowered, otherwise further slowing is likely to occur.

Now, if the BoE and ECB are using an economic slowdown to lower inflation, then they will hold rates and let a slowing economy bring inflation down. The corollary here is that we should expect to see European economies slow further.

2008 Sep 03 08:58 AM