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FX Daily Update

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Could Dollar Weaken in December?

Mon, Dec 8 2008, 10:15 GMT
by Lena Manousarides

FXstreet.com Independent Analyst Team

A new week is starting today, with markets still shocked from Friday’s really negative employment data which saw -533.000 jobs printing for the month of November. This indicates how bad things are in the economy and that the worse may not be seen yet. According to official data, recession in the US has started since last December and is more than likely to continue in the coming years. The new President Barak Obama said so himself in an interview over the weekend, that “the economy will get worse before it gets better”…

Today the economic calendar is almost empty, with only important events being PPI out of UK in the morning and later a testimony by Trichet in front of the European Parliament regarding the economic crisis and the monetary policy. Traders will monitor Triche’s words closely after last week and try to determine what the bank will do in the next meeting. The fact that all recent European data are contracting, is making euro bulls think twice about buying the single currency against the dollar.

EUR/USD closed near its daily highs on Friday and is still trading within ranges of 1.2550-1.2850. A clear break of later level could lead the pair towards 1.2930 and potentially to 1.30. However, if risk aversion continues to “control” the markets, the pair does not have any chance of sustaining its gains any time soon. On the downside, if the pair holds 1, 28, it could fall back towards 1.25. A clear break of the later level could potentially open way for multi year lows of 1.2360.

The question that arises now is how long can the dollar continue to get bid all across the board? Is this situation here to stay? Will dollar continue its recent rally throughout 2009? Let’s think things through before we go buying the greenback! Last Friday’s payroll data showed how deep the recession is and that FED might cut its rates once again, which eventually can come back and haunt the dollar. The only valid reason we can give about dollar’s strength under false pretences is the risk aversion. Somehow traders feel safer buying the dollar and the yen in times of crisis and this is the key to dollars power. When this stops, and believe me it will at some point, traders may eventually make the dollar “pay” for all those moths of solid gains and risk appetite may once again return in the markets, making euro attractive!

It will be interesting to watch how US markets react today after Friday and if the gains we saw recently be able to hold for the next sessions. Market participants are in a great need of some positive sentiment and the very reason we saw DOW JONES gaining after the dismal payroll numbers was another proof that markets are oversold and traders can shake off bad news quite easily. After all they have done so for so many months…

Published on  Mon, Dec 8 2008, 10:17 GMT