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The U.S. dollar succumbed to continued downward pressure

Wed, Nov 29 2006, 07:40 GMT
by Union Bank of California Team

Union Bank of California  |  View company's profile

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The U.S. dollar succumbed to continued downward pressure this morning, falling to a new 20-month low against the Euro and touching near a two-year peak against sterling after the release of a weaker-than-expected U.S. durable goods report.  Durable goods orders for October dropped to 8.3 percent after an 8.7 percent gain seen in September.  Also releasing was U.S. home sales and consumer confidence, which showed homes sales rising in October by 0.5 percent to a 6.24 million annual rate last month, while consumer confidence dropped to 102.9 this month from 105.1 last month. U.S. Treasury Secretary Henry Paulson reacted to the weak dollar by reiterating the U.S.’s strong dollar policy, stating that he feels "very good'' about the American economy.  Traders will await comments from Fed Chairman Ben Bernake later today to garner future insight into fueling expectations that the Fed. will institute a rate cut as early as Q1 of next year. 

The euro reached a new 20-month high against the dollar, and also reached another record high against the yen as policymakers stated that they are not concerned with the Euros’ appreciation.  With the interest rate outlook driving the market’s focus and the U.S. looking more and more towards a rate cut early next year, look for the Euro to hold onto its recent gains.
  
The Japanese yen was little changed against the dollar and remained under pressure as the Euro peaked against Japan’s single currency.  The move was due in part to Japan's retail sales unexpectedly falling for a second month, dropping 0.2 percent in October. The drop undercuts the central bank's call that consumer spending will grow and therefore overnight rates will need to be lifted.  The latest statement from Bank of Japan Governor, Toshihiko Fukui didn’t give any direction as to when the BOJ would make a move, instead offering  that they wouldn’t make a move "too early or too late.” 

Sterling pushed through 2-year high’s seen earlier this week against a pressured dollar and was slightly lower against the Euro due to merger and acquisition flows.  Aiding the pound was comments from Bank of England Deputy Governor, Rachel Lomax where he stated that the inflation outlook has improved thanks to a combination of lower oil prices and a stronger currency.  Look for Sterling to remain supported as the market looks toward any commentary from the central bank as to the likeliness of another rate hike again early next year. 

The Canadian dollar rose against the U.S. dollar with higher oil prices and a weak U.S. durable goods release out of the U.S.  Oil managed to rise to $61 a barrel on expectations for more demand out of the U.S.  With no data due out in Canada today, the market will start to look towards third-quarter current account figures and September economic growth data set to release on Wednesday and Thursday, while November jobs data is due out on Friday.

The Australian dollar pushed lower against the U.S. dollar but remained firmer against the New Zealand dollar off of nineteen month highs due to profit taking.  With the Reserve Bank of Australia increasing rates by 25 basis points to 6.25 percent earlier this month and the potential for future rate hikes heading into next year, look for the Aussie to remain supported.

The New Zealand dollar remained supported on the back of the NBNZ’s business outlook survey, which resulted in 18 months highs.  The kiwi has benefited from broad support over the last month due to carry trades as investors move away from low yielding currency’s and seek higher yielding currencies.

The Mexican peso continued its fall breaking through a key technical level.  After holding its benchmark overnight interest rate steady at 7 percent last week Mexico’s currency remains under significant pressure.  Look for the peso to continue to weaken as the USD/MXN currency pair pushes towards 11.20.

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Published on  Wed, Nov 29 2006, 07:43 GMT

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