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Worries on Deepening Mortgage Losses Pressure Greenback

Fri, Jul 11 2008, 00:48 GMT
by Hans Nilsson

CMS Forex

Worries on Deepening Mortgage Losses Pressure Greenback

• The dollar traded mostly lower versus other major currencies Thursday after Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson told lawmakers that new regulatory powers are needed to insulate the US economy from damage in the event of a big non-bank financial institution would collapse. Paulson also said he had been assured that Fannie Mae and Freddie Mac are well capitalized. His comment did little to ease financial-market concerns about the two biggest mortgage lenders. Former Fed President William Poole earlier said they are technically insolvent and may need government rescue. US labor-market indicators were mixed as initial jobless claims fell the most in nearly three years but continuing claims rose to a new high. The yen fell as US equity prices rose modestly after another volatile session. Sterling declined as UK home prices suffered the largest yearly drop since 1993. The Australian dollar rose following strongerthan- expected Australian employment growth. The Canadian dollar gained as gold and crude oil prices rose.


• The EUR/USD rose after Paulson said financial markets will take “additional time” to stabilize. Despite all the negative news about the US economy, the pair has moved sideways since March. The US economy is in a mild recession and the current US interest rate is 225 basis points lower than the ECB rate. Still, the pair is below its April high, signaling the pair is forming a top. Therefore, we sell the EUR/USD with stop at 1.5930. There are support at the 1.56-handle and resistance in the 1.58-area.

Financial and Economic News and Comments

US & Canada

• US initial jobless claims unexpectedly dropped 58,000 to 346,000, the biggest decline in almost three years, in the week ended July 5, the Labor Department said. The 4-week average fell 10,000 to 380,500, close to the 400,000 level that is usually associated with economic downturns, indicating a difficult employment situation for US workers. Continuing claims rose 91,000 to 3,202,000 in the week ended June 28, the highest level since December 2003.

• US Treasury Secretary Henry Paulson said he has been assured by the regulator for Fannie Mae and Freddie Mac that the two mortgage companies have enough capital. “Fannie Mae and Freddie Mac are also working through this challenging period. They play an important role in housing markets today and need to continue to play an important role in the future,” Paulson said in testimony to the House Financial Services Committee. Regulators need “additional emergency authority” to help ailing firms, along with a resolution process similar to the one already in place for commercial bank failures, he said. “We want a strong dollar. A strong dollar is in the US interest,” Paulson replied when asked about the US dollar policy.


• Federal Reserve Chairman Ben S. Bernanke called for “additional tools” for the Fed to maintain financial stability in the aftermath of the credit crisis. Congress should give a single federal regulator enhanced power to set standards for the capital, liquidity and risk management of investment banks, Bernanke said in testimony to the House Financial Services Committee. At the same time, he warned against overregulation that could hurt financial markets. “The financial turmoil is ongoing. Our efforts today are concentrated on helping the financial system return to more normal functioning,” he said.


• San Francisco Fed President Janet Yellen said the US economy is likely to maintain slow growth the rest of this year before accelerating in 2009, while inflation is becoming a greater concern. “I expect the economy to grow only modestly for the remainder of the year, but to pick up next year,” Yellen said.

Europe

• UK house prices declined 6.1% y/y in the three months ending in June, the biggest drop since March 1993, HBOS Plc reported. Prices fell 2% m/m to an average £180,344 ($356,000).


• The Bank of England kept its key interest rate unchanged at 5.0%, as forecast, despite UK slowing economic growth.

Asia-Pacific

• Employers in Australia hired 29,800 workers in June, more than expected, amid mining expansion by BHP Billiton Ltd. and Rio Tinto Group, following May’s 25,600 decline, the statistics bureau said. The unemployment rate fell to 4.2% from 4.3%.

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Published on  Fri, Jul 11 2008, 00:54 GMT