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Will Dollar Be the Next Victim of Economic Meltdown?

Wed, Sep 17 2008, 11:36 GMT
by Lena Manousarides

FXGreece

What a week this one is turning out to be, with currencies rising and falling like a roller coaster.  For instance, the EUR/USD opened at 1.4480 on Monday and lost all its gains on the same day; dropping all the way down to 1.41. Tuesday was no better, as traders were waiting for the FOMC meeting for any hints as to how the dollar would fare.

Since Monday morning's abrupt awakening when Lehman Brothers told the world they were filling for bankruptcy, markets have been deeply frustrated, with DOW JONES losing a record 500 points and NIKEI dropping 600 points. These are fragile times for the world economy and news that two of the biggest Investment groups, Lehman Brothers and Merrill Lynch were in turmoil, made investors even more wary and therefore a broad liquidation occurred.

From then on, speculation started that the FED would cut the rates this week, but once again the American Central Bank refused to be pressured and left the rates unchanged. The statement afterwards was dovish for the dollar, as the Bank implied that inflationary pressures are starting to elevate. The drop in oil and appreciation of the dollar were two factors that the Bank cannot ignore for the future of interest rates.

The EUR/USD was initially down on the FOMC meeting, with the dollar gaining across the board, however after traders realized that Bernanke and co. will possibly stay neutral when it comes to the rates, the dollar lost its gains and the pair returned to its pre-meeting levels.

Today’s calendar is almost empty, with the only news form America being the building permits. Traders will monitor closely all developments in the Housing sector, but the news is not expected to cause any big moves. The other important event today was the BOE minutes from the last meeting where they decided to leave rates unchanged. Today’s outcome was 8-1, which means that 1 wanted to cut rates and the others wanted to leave them unchanged. Blanchflower was once again the one who insisted on cutting the rates as much as 50 pbs.

The GBP/USD broke higher today, printing 1.7980, however fresh worries of HBOS shares being in trouble again saw the pound in a free fall, losing all its original gains. The pair is trading at 1.7880 at the time of writing and a clear break of either 1.7950 or 1.5830 will give us the next direction. With markets being so up and down these days, there is no clear direction for the currencies and although sterling is still on the defensive, it has managed to stay above 1.75 and kept that level as a good support.

The EUR/USD is trading heavily these days with many whipsaws and fake moves,  and the next resistance level now lies at 1.4280-1.4320. A clear break out of those levels can lead much higher towards 1.44. On the downside, good support levels are at 1.4180 and 1.4130 and only a clear break of that can lead below 1.41. As the pair moves we can always try to buy near 1.41 and sell near 1.43.

In the next coming days we don’t have anything very important news wise, however all eyes will be open for more developments in the banking sector. Let’s not forget that fundamentals and technicals these days seem to take second place, as traders act only on their fears and speculations.

One would wonder how come the dollar doesn’t collapse against its other counterparts, what with all data coming out badly and more US Banks reporting serious losses. Well, the answer is that although the EUR/USD has managed to recover above 1.40 in the last week, there are still downside risks and only a clear break of 1.4350-1.44 will open way for further gains in the pair till 1.46-1.47. Let’s not forget that in troubled times, traders are using the dollar as safe haven and that is what we see at the beginning of the week when risk aversion took place.

Let’s see what today brings after New York opens and how traders will react to the ongoing economic developments and credit woes.

Published on  Wed, Sep 17 2008, 11:38 GMT