Dollar on the Defensive Pending Bernanke Testimony, Retail Sales Data

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Includes: ERO, UDN, UUP
by: Grace Cheng

The US dollar had a good start when the forex market opened in Asia on Monday and into the European trading session, inspired by the US government’s plan, reported Sunday evening, to help the struggling mortgage giants Freddie Mac (FRE) and Fannie Mae (FNM). But as we move into the New York session, traders are taking their profits on the dollar's strength for fear that the US currency may not have sustained buying interest due to continued downside pressure on the US stock markets and focus on oil prices.

The US dollar will play defense this week, and how could it not? The US subprime crisis is rearing its beastly head, and instead of talking about economic recovery, we are talking about an economic disaster that has to be averted or cushioned to some extent. George Soros is suggesting that there could be further weakness for the greenback.

EUR/USD dipped to an intraday low around 1.5840, but now is trading above 1.5900 again. If it can break successfully above 1.5980, it could retest 1.6020, its all-time high. Nearest support is around 1.5840. USD/CHF’s resistance lies around 1.0280 and support is around 1.0110.

Whether you trade currencies or stocks, you must not miss Fed chief Bernanke’s testimony before the Senate Banking Committee on Tuesday. If what he says is reassuring to stock investors, or if he explicitly mentions the weak US dollar exchange rate, the US dollar could get a respite. If not, the dollar will play defensive. US stock performance this week will also be decided by Q2 earnings results from tech giants like IBM (NYSE:IBM) and Microsoft (NASDAQ:MSFT).

Today, Freddie Mac initiated sale of $3 billion worth of bonds, and its treasurer said just a little while ago that today’s bond auction was “business as usual” with “very, very strong” foreign investment. According to the treasurer, Freddie has not seen a “crisis of confidence” when it comes to raising capital. Sure, bond sales may be business as usual and demand for their notes is supposedly higher than average, but I’m not sure if stockholders feel the same degree of confidence as bond buyers. These days, “reassuring” words mean very little.

As for Freddie and Fannie stocks, Goldman Sachs (NYSE:GS) said Monday they may fall another 35%, estimating that Fannie Mae may drop to $7 from $18 and Freddie Mac to fall to $5 from $17. With regards to the government bailout plan of these publicly traded companies (Treasury’s Paulson is seeking Congress's approval for unlimited authority for 18 months to buy as much stock of these companies as he deems necessary), veteran investor Jim Rogers said:

 

I don’t know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae. So we’re going to bail out everybody else in the world. And it ruins the Federal Reserve’s balance sheet and it makes the dollar more vulnerable and it increases inflation.

 

I have to agree with him.

Economic Calendar For Tuesday:

Italian CPI 0800 GMT

UK CPI, retail price index 0830 GMT

German Zew 0900 GMT

US PPI, retail sales, Empire manufacturing 1230 GMT

Bank of Canada rate decision 1300 GMT (rate expected to stay at 3%)

Fed Bernanke gives semi-annual monetary policy testimony before Senate 1400 GMT

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