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US Dollar in the Doldrums

Currencies / US Dollar Nov 05, 2007 - 08:08 AM GMT

By: Regent_Markets

Currencies The Dollar again grabbed the headlines last week as it hit all time lows against the Euro and levels not seen in generations against the Pound & Canadian Dollar.

The reason for this drop in the medium term has been the gradual weakening of the US economy as it tries to fight the effects of the credit crunch and a housing slump. Recent Case-Schiller data showed that US house prices fell for the eighth consecutive month with most of the country's regions posting declines. On Thursday, banking stocks suffering their worse fall for years as US giant Citigroup was battered by analysts down grades. This comes on top of a recent 57% drop in third quarter profits compared to last year. Citigroup are now in danger of dropping out of the top 10 US companies by market capitalisation. Top of the list Exxon Mobil also disappointed with below estimate earnings despite record oil prices. To cap all this negative data, former Fed chairman Alan Greenspan went on record as saying that the US trade gap implied dollar erosion and with an accelerating decline.

Of course the short term reason for the drop in the dollar last week was the widely expected quarter point cut in interest rates by the FOMC. Notable however, was the unusually hawkish language that accompanied the statement. One economist called the wording as “subtle as a sledge hammer” because of the bold way it indicated that this was the last cut for a while. Hawkish comments from the MPC combined to send the USD/ GBP exchange rate within touching distance of $2.09 to the pound.

Equity markets initially greeted the FOMC decision positively, pushing the S&P 500 past last week's high and the Nasdaq to fresh new highs for 2007. On Thursday, however all the good work was undone as earnings fears and the reduced probability of further cuts brought out the sellers in force. The fall was of the same magnitude as the mauling on the 19th of October which brought out lots of shock headlines in the mainstream press. This time it was hardly reported. When the press gets hold of something, it may pay to go the other way. When the same thing is met with silence it could be time to get genuinely worried.

Notable announcements next week are UK industrial production figures on Monday, US Non-farm productivity figures on Wednesday, trade balance numbers and consumer sentiment data on Friday. In all it looks a data heavy week and we haven't even mentioned the MPC and ECB interest rate decisions on Thursday. The consensus estimate is that both central banks will announce no change statements, but as ever it is the reading between the lines on the next decision that will cause the excitement. ECB president Trichet is speaking after the statement.

Last week's German PMI figures were well below estimates, which might call into question the widely held view that the next ECB move will be up. Friday's payroll numbers indicated that there may be life in the US economy yet. The dollar may have further to fall, but perhaps Greenspan's accelerated decline may not come to fruition, particularly against the Euro. If the ECB keep rates on hold over the coming months, or even cuts them, as some now think they might, then the dollar's decline could become more measured.

Therefore, a long term trade that picks up on the possibility of a slower Dollar decline might be attractive. Traders ar predicts that a no touch trade on the EUR/ USD with the trigger set to 1.50 over 180 days pays a 78% return. If the dollar falls only a little bit more, stays still or strengthens against the Euro then the trade wins. The trade is not without its risks, but that is reflected in the price.

By Karen
Tel: +44 1624 678 883 /

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