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Further Dollar Weakness Ahead?

Mon, Jul 14 2008, 14:56 GMT
by Lena Manousarides

FXGreece

Euro bulls were clearly in control last Friday when the EUR/USD broke important resistance levels of 1.5830 and then 1.59, making new monthly highs near the record 1.60. After the Sunday market opening, we saw more euro strength, but the move towards 1.60 faded therefore at the European opening the dollar strengthened and the EUR/USD fell towards 1.58.

What caused the dollar weakness these days? Well, what else? It’s the same old story; speculators were having a field day trying to hunt stops above 1.59 after news broke late Friday that Fannie Mae and Freddie Mac were in serious trouble due to the credit crisis, causing the dollar to suffer big losses against the euro and other currencies. The fact remained that although the news was negative for the greenback, the move from 1.5750 to 1.5950 was overdone and the reasons for it was not because traders realized the US economy is in slowdown; but because of stop hunting. The big players took the opportunity to go long on the euro from 1.5750 and extend the move towards 1.60. When the market opened on Sunday, we saw another wave of dollar sales until 1.5970, however the move did not have the energy to continue towards 1.60. It was clear from this morning’s news both the FED and the US government wanted to calm the market and pass the message that whenever a bank or a credit institution is in trouble, ‘SUPER FED’ will come to the rescue. Paulson’s message in his testimony last Thursday was clear: bug banks and institutions HAVE to be allowed to fail! On that note, stocks plummeted and the dollar was sold off. Come Monday morning and all of a sudden everything is hunky dory again. Paulson and the FED decided to take action concerning Fannie and Freddie and therefore stocks were up on the news and the same thing happened with the dollar.
EUR/USD broke support this morning at 1.5860, printing daily lows at the time of writing of 1.5840. A clear break of 1.5830 opens the door marked 1.58 and then maybe the one marked 1.5760 too - another good support level.

GBP/USD followed the dollar’s weakness too, as the pair moved higher towards level 2. This move again found limited interest and it soon faded, correcting back towards 1.98. The pound was and still is weak against the euro, especially after the latest round of disappointing economic data. This is evident in the EUR/GBP after the pair made new multi-week highs towards 0.8050.

This week the economic calendar is full of important data, starting with the FOMC minutes in the middle of the week, which will be monitored closely by the markets, in order to have an idea of the FED’s next move regarding interest rates. Analysts predict that the FED won’t hike rates just yet with the credit crisis still running and economic data still on the negative side. Apart from the minutes, we have the inflationary data with both CPI and PPI being crucial in deciding the dollars fate. If low inflation figures are printed the markets will immediately speculate the Fed won’t hike rates but instead either leave them unchanged or potentially drop them. That fact will weigh on the dollar; as recently the speculation of a possible hike was on every trader’s lips. It will also be interesting to see the numbers from the both retail sales and TICS data, which are announced later this week. The calendar is full of data which moves the greenback and if all the data disappoints then the dollar will continue to fall.

Euro bulls are in control at the moment but any economic data out of the Euro zone will certainly play a role in its direction for the next few days. German ZEW is to be announced this week and if the number comes lower than precious months, we may see a dent in the Euros strength. The fact the euro is hovering near 1.60 is not to be ignored as negative comments for the appreciation of the single currency could potentially arise once again.

One thing is certain, whatever happens in the next few days, dollar bulls have a long way to go before any sustainable strength and the fact the market is still in negative towards the US currency don’t make things any easier for the greenback.

Later this week Bernanke testifies in front of the Senate, on the subject of economic conditions and the monetary policy. Markets will monitor his speech closely for any clues as to what the bank will do in the future, but our view is he has spoken so many times in the last few weeks on a different subject each time; the FED is losing credibility with the market.

It is vital to see a change in the oil situation over the coming days too, as last Friday it broke into new record highs at 147 dollars per barrel. This occurred for geopolitical reasons such as Iran’s “war games” on Friday and also oil line disruption in Nigeria. The fact that DOW JONES went into negative territory and almost broke the psychological barrier of 11.000, added even more fuel to the speculators, who saw a chance to push the oil even higher.

Oil is up towards 1.50, EUR/USD is up towards 1.60, DOW JONES close to 11.000 and US economy still in the damps! What’s next from here? Will the dollar be able to defy all negative sentiment and find some kind of strength in the short term? Will the oil finally reach its peak? The answers to these questions are coming, but we may have to wait a while longer, especially with August just around the corner and traders getting ready to find some peace and quiet in holidays. Expect a potential consolidation until the end of August and then some real action after the holiday season finishes.

Today, things seem quiet in the currency market following New York’s opening and we suspect any moves will be muted after the busy Friday. Watch for any comments from US officials regarding Fannie and Freddie, plus any developments which occur in the banking sector.

Published on  Mon, Jul 14 2008, 15:10 GMT