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FX daily Commentary

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How Long Can the Dollar Remain Strong?

Tue, Oct 7 2008, 09:26 GMT
by Lena Manousarides

FXGreece

What a start of the week we had yesterday, with all markets in the red and DOW JONES breaking important psychological level of 10000 for the first time since October 2004!

What we witnessed yesterday was beyond reason and normality, and many traders all across the globe were left shaken and confused by the markets shenanigans. The main reason for this absurd move in all markets was fresh and renewed fear and uncertainty regarding the global economy and the fact that it became known that the $700B was not enough to fund all Banks and more money would be needed. The move by the FED to provide another $400B was seen by many investors as desperate move; however it was clear from the US authority approach that in desperate times we need desperate measures!

EUR/USD broke important support level of 1.35 and printed a new low at 1.3440 where it corrected form then on. Today the pair was trading well above 1.35 with 1.3620 highest levels seen so far. The move was not enough to break further higher though and pair dropped 100 points.

At a time like this there is a question amongst traders, why the dollar is so strong with US economy going into recession? Well there is not an easy answer there; however it might be interesting to see that in previous recessions, US currency was always strong in order to help the trade deficit. With the 700 billion rescue plan, the trade deficit will be even wider and therefore the only way to fight it is through a strong currency. Also the fact that we have the US elections soon is another factor to consider, however with this madness that we experience daily all the logical explanations as to why anything happens, are out of the window.

Today the economic calendar is empty, with only important events being the speech by Bernanke in Washington regarding the bank’s monetary policy and the state of the economy which traders will monitor closely due to the latest developments. Analysts are looking for signs as to what the bank is planning to do to fight the situation and many predict that it will be forced to cut rates sooner rather than later. Also a bit later today we have the FOMC minutes from the last meeting and again traders will be looking for hints as to what are the banks plans.

EUR/USD is clearly one downtrend and as long as it is trading below 1.3660 we shall see further losses. If the pair breaks 1.34, next important level is at 1.3360.

So, in a few words, we are experiencing very difficult times right now and the only wise thing to do is to stay aside and remain aside until the markets calm down. If we trade we need to be aware that technicals and fundamentals do not apply these days and we can only trade the trend until signs of reversal arise...

Published on  Tue, Oct 7 2008, 09:29 GMT