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Daily FX Commentary

Daily FX Commentary

Wed, Nov 7 2007, 11:28 GMT

Investica Ltd  |  View company's profile

China comments hurt dollar

The dollar remained under pressure on Tuesday, weakening to fresh all-time lows against the Euro around 1.4570, while the dollar was also at fresh lows on a trade-weighted basis. Selling pressure accelerated in Asian trading on Wednesday after a Chinese adviser suggested that China should increase the proportion of reserves held in stronger currencies such as the Euro. The remarks fuelled fears of diversification away from the dollar and further undermined confidence with fresh lows near 1.47 in Europe.

There were no significant data releases on Tuesday, but overall confidence in the US economy remains at depressed levels. Markets are still concerned that there will be further credit-related debt write-downs by the major US investment banks which is having a negative dollar impact. There are fears that the economy is deteriorating while the speculation is also fuelling expectations that the Fed will be forced to cut interest rates again. In this context, markets are putting the chances of a December Fed rate reduction at above 60%. The dollar will tend to remain vulnerable in the short term unless there is evidence that the global economy is deteriorating as well in which case there would be a more balanced currency assessment.

Euro-group head Juncker stated that he preferred a strong Euro to a weak one, but also warned that he was allergic to excessive volatility. Markets will remain on alert for tougher rhetoric from officials and potential central bank intervention given that markets are threatening to become disorderly after heavy dollar losses.

Published on  Wed, Nov 7 2007, 11:29 GMT

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