Pending Fed Rate Decision, Dollar Loses Steam

A lot of maybes are now swirling around in the air of the financial markets. Speculation is now rife that the Fed may spring a surprise interest rate cut as they are concerned about the widening spreads in the credit markets. Should that become true, the US dollar would be one of the first to take a hit, and that would be a setback to the currency’s ongoing strong uptrend.

On Friday, weakness showed up in the dollar as traders took the opportunity to take profits of long USD positions against the Euro, Swiss franc and the British pound. However, its weekly performance is still a standout. This week the US dollar has finished higher again against its major rivals such as the Euro, Swiss franc, Australian dollar and New Zealand, but down versus the Japanese yen and British pound (a surprise).

Not a bad week considering that the financial markets have been bombarded non-stop by news about Lehman (LEH) - Lehman’s impending doom, banks rejecting Lehman, banks showing some interest in Lehman, the US Treasury trying to hard-sell Lehman to other banks- like the Bank of America (BAC) - and so on.

Other bullets that the US dollar has had to dodge were disappointing economic reports from the US. Friday’s release of US retail sales data wasn’t as positive as the market had expected; sales fell 0.3% in August, worse than the 0.2% rise expected, and sales excluding autos dropped 0.7%, much more than a forecast 0.2% fall. However, a much-better-than-forecast consumer confidence survey (which rose to 73.1 versus 64.0 expected) has taken away some bitterness from the poor retail data.

Below you can see at a glance how the major currency pairs have fared over the week:

EUR/USD: 3rd week of decline

USD/CHF: 9th straight week of advance

GBP/USD: 1st week of recovery in 8 weeks

USD/JPY: 4th straight week of decline

NZD/USD: 3rd straight week of decline

AUD/USD: 8th straight week of decline

Technically, Euro has a high chance of rebounding versus the US dollar next week in forex trading. Nearest topside targets are 1.4230, 1.4280 and 1.4320-30. 1.3880 should serve as a safety net for the time being. The Euro is also being boosted by EU’s Juncker’s comments that Europe is not on the verge of a recession. And contrary to the latest European Commission report and economic data, he said Germany ’s economic growth is quite robust and it is “far from” recession.

Next Tuesday, the Fed will announce its rate decision on the interest rates, and the greenback’s near-term sentiment will hinge on that.

Comments

[Reinko:]

Amazing; about 250 pips up in the last 24 hours on the €/US$ pair...

The rumor that the FED will do a 'surprise cut' looks not very realistic:
1) In the first place there is a long tradition of the FED sitting on her hands at this phase of the US eclection cycle.
2) All those 'providing liquidity' programs from the FED (like the money auctions or the bond auctions for the primary dealers) did nothing for the spreads. Why should a 25 basis point cut do?

__________

About the Juncker words: No Europe is right now not on the verge of recession but in the long run I have not observed one detail that clearly says we will prevent stagflation. There is so much commodity induced inflation in the pipeline at the producer/wholesale level that at the time recession sets in, inflation does to.
Hence for Europe the stagflation expectation is still dominant.

For the USA: Look at your own commodity stuff and price indexes on the import/producer/wholes... level. Beside this: The fundamentals are far more against the USA as against Europe.

2008 Sep 12 03:58 PM

[User 30121:]

A rate CUT is imminent! Why, because China has a bizzillion dollars, that's USD, and they are not going to take a hit because of the US's mis-management, so they want gold (in payment for our debt)! So, look out down below, here comes the USD, and watch out for flying aircraft because gold is in going UP!

2008 Sep 13 08:37 AM

[CaptBob:]

There is a much larger aggregate number of dollars out there, many with the ink still wet, thus diminishing the value of each individual dollar.

No rate ups or downs or investor confidence numbers is going to change this. The value is down and will stay there, except in Govt. stats where like inflation it is where they say it is!. Are you a believer??

What's a pound of trust and confidence in the U.S. worth???
Not much I expect---just like the U.S. dollar depending on it!!

Where is Hank Paulson these days??. At least he got out before Goldman takes their hit. Oh yes, now I remember, in charge of our treasury-------that's comforting!

2008 Sep 13 10:08 AM

[elwind45:]

Just because the credit is being pumped into the system doesnt mean it is reaching the economy. This credit is targeted to the banks balance sheets. The fed is restricting credit for growth. The banks are hoarding the liquidity. An example would be mae and mac.It would be better in long run to allow the foreclosures to continue. Having the government on the hook for the asset, and bakstopping the loss is easy street for the mortgage holder. Just empty the house and move on. A rate cut would help the I-banks balance sheets and since they have tied themselves together, if one fails they all go down. This economic blackmail has no end. It would be better to enter a sweepstakes on naming the new system than to worry about what if's. Take 2% down to zero what the heck? Its F'N over, over over over over get it?

2008 Sep 14 05:02 AM