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Weekly Analysis

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US Dollar is weakening further amid political concerns in the Middle East

Tue, Dec 30 2008, 06:20 GMT
by Benny Menashe

Finotec Group Inc.

Last week the US Dollar continued its decline against the Euro, pinning down at 1.4060 amid glooming prospects to the American economy. US figures re GDP 3Q, -0.5% has proved to be consistent with the shrinking number of jobs, and a growing number of unemployed (586,000 which is 34,000 higher than previously expected).

The US Fed is trying its utmost to fight a likely recession but it remains to be seen if cutting down its interest rate to 0-0.25% will make much of a difference in the immediate future. Analysts believe that the American currency is likely to weaken further against the Euro since the ECB is unlikely to cut its interest rates below the current 2.5%, but technically-speaking lower volumes in the markets are likely to maintain EUR/USD at 1.4170 and the possibly 1.4270 even before New Year’s Eve.

Markets investors enter the final week of the 2008 battered and bruised and any bounce in the next few days will do little to repair tattered portfolios. Nevertheless the main issue is whether the miraculous “January Effect” will be able to lift both stocks and moods in the markets , a most-welcoming move at this point of time.

On the economic front, markets have few data points to watch in the coming week. Consumer confidence for December is reported Tuesday followed by ISM manufacturing data which is due out on Friday. Both are likely to highlight the recession towards which the US is sliding, and causing a further weakening of the US Dollar. Whilst crude was supported on Monday, the American currency lost over 2 percent against the Euro, its biggest decline in more than a week, bolstering the appeal of dollar-priced assets used to hedge against inflation, such as gold and oil.

Israeli warplanes pounded the Hamas-ruled Gaza Strip for a third consecutive day on Monday and prepared for a possible invasion after killing 307 Palestinians in the air raids. World oil prices rose as much as $2 to over $40 a barrel on Monday and one ought to remember the geographical risk to crude supplies from the Middle East. Oil prices soared to a then-record $78.40 a barrel in July 2006 after Israel attacked Iranian-backed Hezbollah forced in Lebanon.

This week, markets will also mark the beginning of the New Year, and one should expects lower volume and volatility due to many investors going on holiday and praying for a better year (and yields) to come.

Published on  Tue, Dec 30 2008, 06:22 GMT