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Dollar Damage Extends on Earnings, Jobs, FX Confidence

Thu, Oct 18 2007, 13:14 GMT
by Ashraf Laidi

CMC Markets

In a vocal display of deteriorating weakness, the dollar hits new all time lows against the euro ($1.4300) and 2-week lows against the yen (115.25) as the combination of further US housing woes and disappointing earnings in the US’ largest deposit bank raise the downside risks for the US economy and increase chances of an October Fed cut. One day after the US largest bank took an earnings hit in Q3, Bank of America , the US ’ second largest bank reported a 32% drop in Q3 on credit-market write-downs and loan losses. Unlike earlier this week when market losses from Citigroup earnings boosted the US dollar against most currencies on flight to quality, the current market declines are triggering broad dollar losses as the latest news are not only US-specific (BoA largest US deposit bank), but also due to Wednesday’s ominously weak US figures on building permits and housing starts and today’s stronger than expected UK retail sales reducing chances of a 2007 BoE rate cut.

Worsening the dollar's declines is the bigger than expected 28K increase in weekly jobless claims to 337K last week, the biggest 1-week surge since February 10th. The figures increase the downside risks for the US economy as they raise the likely repercussions of the current slowdown for the US consumer and US jobs.

Comments from Chinese central bank chief Zhou Xiaochuan indicating that more policy tightening will be needed to cool the overheating Chinese economy, are boosting the Japanese yen on nervousness that reduced Chinese demand combined with a slowing world economy may further dampen global growth. Equally important, Zhou reiterated China will allow a greater role for market forces to determine the yuan's exchange rate, and that he was "sympathetic" to Europe 's concern about the yuan's level against the single currency. The currency comments could also be taken as lip service to the G7 meeting, which is expected to reiterate its calls towards China to adopt further currency flexibility.

We expect the official G7 communique on currencies to be modified only slightly by placing more emphasis on the undesirability of excessive currency moves, which is meant to be a veiled attempt at signaling coordinated efforts to support the falling dollar in the event of faster and “disorderly” depreciation. We also expect China to raise interest rates this Friday to stem inflation from its 6.2% level (more than double the government target), which would be a vocal message to the G7 that Beijing is conducting market-based measures to cool its economy.

Gold luster shines on broad dollar weakness

Gold surges above $760 per ounce as the dollar drops against both the yen and the euro, which is prompting traders to increasingly seek the metal currency as an alternative to the interest-bearing paper currency, whose yield is expected to be reduced further by the Fed. We have seen in the past how gold prices declined during a falling USDJPY when the greenback held firm against European currencies and high yielding currencies. Such episodes were largely a manifestation of reduced risk appetite prompting traders to cash in their net longs in gold to meet their losses in equities and high yielding carry trades. Today, however, the rallying gold price is a reflection of further erosion in dollar confidence. Yet we do warn that the current gold rally may have to be reversed to as low as $710 per ounce as the amount of net long positions in the IMM futures market have reached a record high of 222K.

Euro surges to new all time high at $1.43

USDJPY drops on PBOC, BoA, Fed cuts

Sterling boosted by strong retail sales

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Published on  Thu, Oct 18 2007, 13:17 GMT