Currency Trade Overview: Dollar's the Place To Be

Includes: DRR, FXE, UDN, UUP
by: The LFB

Overall: While stock markets traded the Peak Growth theory, currency traders apparently decided the dollar was still the best place to be. The weekly report on unemployment claims showed that the number of people continuing to receive benefits rose to the highest in five years. Meanwhile, even though the headline number for the ISM non-manufacturing index showed expansion in the sector for the first time in three months, things may not be as good as they appear. "A welcome aspect of the report was the decline in prices," said Matthew Carniol, chief currency strategist at "Of concern was that employment continues to weaken at a faster pace and that new export orders contracted at a faster pace. Taken together, with growth decelerations now expected to continue in Europe and parts of Asia, we may have a peak reading for this sector."

The Euro (Eur/Usd) declined strongly against the dollar after the ECB press conference, which followed their decision to hold borrowing costs steady at 4.25%. The ECB appears to be more uncertain about the overall outlook than at any time in recent memory. During the press conference, Mr. Trichet said, ""upside risks to price stability prevail," before adding that "the uncertainty surrounding this outlook for economic activity is particularly high at the current juncture," and that "downside risks prevail." The bank lowered its projections for 2008 and 2009 growth while upping their expectations for inflation, a stagflationary situation that probably signals the bank is on hold into 2009 even as the economy continues to weaken.

The Pound (Gbp/Usd) continued its decline on Thursday.  The Bank of England kept its main borrowing rate at 5.0%, a decision which was not followed with a statement. Meanwhile, HBOS, Britain’s largest mortgage lender, said that U.K. house prices fell by the most since the company began keeping records in 1983 in August. The average cost of a home dropped 12.7% to 174,178 pounds from the same month a year earlier as banks continued to restrict access to credit and consumer confidence plunged.

The Aussie (Aud/Usd) fell to its lowest level since the week of September 2, 2007 after after the Bureau of Statistics said Australia's trade balance turned to a deficit in July as oil imports surged and exports fell, taking analysts by surprise. The trade deficit was A$717 million compared with a revised surplus of A$351 million in June. Yesterday, the Bureau of Statistics said Australian gross domestic product rose 0.3% from the first quarter but that without the contribution from exports (and especially by China's demand for raw materials), the economy would have contracted 0.2% in the quarter.

The Cad (Usd/Cad) rose as crude futures advanced nearly $1.40 on the day. Yesterday's statement from the Bank of Canada indicates "that borrowing costs are likely to stay on hold at least through the rest of 2008," said Matthew Carniol, chief currency strategist at

The Swissy (Usd/Chf) rose slightly on the day even as traders bought U.S. debt, driving the yield on 10 year notes down to its lowest level since April.  

The Yen (Usd/Yen) declined to its lowest level since July 22 on Thursday as traders closed carry trade positions during the S&P's near 3% decline. The Yen was the only major currency to gain on the dollar during Thursday's trading session.