Dollar's Recent Strength Has Little to Do With U.S. Economy

Oct. 02, 2008 2:31 PM ETUUP, UDN4 Comments
Grace Cheng profile picture
Grace Cheng
226 Followers

Financial institutions have tightened their grip on their purse strings, and their level of caution in dealing with other banks and financial firms has risen sharply since the collapse of Lehman Brothers (LEH). Forex trading volume is now much reduced compared to before, just like in stock trading. Thursday is another day of uncertainty in global markets, and despite all odds, the US dollar has chalked up another day of strong gains against the Euro, Swiss franc, British pound, Australian dollar and New Zealand dollar in the forex markets.

This dollar upward momentum has almost little or nothing to do with economic data from the US, but rather, is likely to be associated with the lack of liquidity in the markets, and the downbeat remarks made by ECB honcho Trichet. Large speculators closing their losing short USD positions also contribute to the sharp rise in the dollar as their stops get hit. It doesn’t matter that US initial jobless claims rose to the highest level in 7 years, coming in at 497,000 in the week ended Sept. 27, the highest since 517,000 in the week ended Sept. 29, 2001.

What’s even more important was Trichet’s press conference Thursday, after the ECB left interest rates on hold at 4.25%. Trichet gave the strongest hint to date that the ECB is considering changing its stance on monetary policy in light of slower growth prospects in the Eurozone. Although the decision to leave rates unchanged was unanimous, Trichet said they have also broached the option of a rate cut. Also, instead of emphasizing inflation risks, he said upside risks of inflation have lessened.

The most recent data clearly confirmed that economic activity in the euro area is weakening. Upside risks to price stability have diminished somewhat but have not disappeared.

His wink of a possible upcoming rate cut has spurred a 150-pip fall in the EUR/USD currency pair Thursday, causing the pair to dip to an intraday low of 1.3745, and that is the lowest since a year ago.

Friday will bring about big moves in the currency market as well, as we look forward to the Biggest Lottery Of The Month - the US non-farm payrolls, and the latest news on the bailout bill.

Economic Calendar For Friday:

Swiss CPI 0545 GMT

UK PMI services 0830 GMT

Eurozone retail sales 0900 GMT

US non-farm payrolls 1230 GMT

This article was written by

Grace Cheng profile picture
226 Followers
Grace Cheng is the founder and editor of GraceCheng.com (http://www.dailymarkets.com/), a leading New York-based financial website that is a must-read for traders and investors who want high-impact financial news, market information and opinions from traders. GraceCheng.com has been praised by the Financial Times for "offering useful tips from the ground". She is also author of "7 Winning Strategies For Trading Forex" (2007, Harriman House, UK). Hundreds of individual traders worldwide have benefited from her proprietary online PowerFX Course. Grace Cheng is a frequent contributor to many leading financial publications such as Technical Analysis of Stocks & Commodities, The Trader's Journal, The Forex Journal and Smart Investor, and is also a frequent contributor to Investopedia's Forex Education section. She is actively involved in the forex and stock markets. Visit DailyMarkets.com (http://www.dailymarkets.com/) Subscribe to Daily Markets RSS feed (http://www.dailymarkets.com/rss.xml)

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