Forex Wrapup: Dollar Benefits As Traders Focus on Weak Economies Elsewhere

by: Grace Cheng

Big and largely one-directional moves have dominated the forex markets this week, and once again, the US dollar is the crowned winner against major currencies. It isn’t just any rebound; the dollar rose mightily to multi-month highs versus the Euro, Swiss franc, British pound, Japanese yen, and was also up against commodity currencies like the Canadian dollar, Aussie and Kiwi.

This week marks the fourth straight week of USD advance against the EUR and CHF, coinciding with the commencement of the Olympics in Beijing on 08/08/08. The current dollar rally is not irrational even though the US economy is still in the dumps. We are currently seeing a massive overturn of expectations relating to rate advantage in the market.

Weak US economy to pull the dollar down? That’s an old story. What’s “new” is that we are getting hard proof of the beginning of a big slowdown and possibly a recession in other countries outside the US, and this includes the Eurozone and the United Kingdom.

EUR/USD broke below the crucial support level of 1.5280 Friday to an intraday low of 1.5005. Both the Bank of England and the European Central Bank kept their main interest rates on hold Thursday, despite fast-rising inflation in these two regions. ECB president Trichet said that “overall, downside risks prevail” while still highlighting the irritating problem of inflation. He also said that existing financial market risks may affect the Eurozone’s real economy more negatively than expected.

Traders are reducing expectations that the ECB will raise interest rates this year, given the tightrope situation it is in when it comes to balancing both economic and inflation risks. As much as Trichet voices his concerns about inflation, he is stuck, and being stuck isn’t a good thing for the Euro.

GBP/USD has fallen very hard this week on worsening economic data from the UK, it fell below 1.9300 for the first time since March 2007. However, the end of pound weakness is still not in sight. The UK has got a big bag of worms that is only beginning to catch people’s attention.

UK house prices fell the most in at least 25 years as banks are reluctant to lend to potential property buyers and as Brits become increasingly concerned about the economy. Nationwide Building Society’s index of consumer confidence fell by the most in four years.

Adding to the economic woes faced by the UK, prices of goods and services rose at the fastest rate in more than 10 years. But, can the BOE do anything much about it? Nothing really, except to sit on their hands.

Next week brings along another blockbuster week of data from the US, UK and the Eurozone. US data highlights include US trade balance, retail sales, inflation and manufacturing data. The pound could be weighed down by UK inflation, housing, retail sales data and the BOE quarterly inflation report.

Yes, there’s a whole lot of news and information coming, and along will bring about high volatility in the forex markets. Day traders will love it as potential for profit increases, but remember this, bounces do happen and will happen.

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