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Daily Forex Strategy Briefing

Greenback Rises on Rate Hike Hopes

Wed, Jul 23 2008, 22:44 GMT
by Hans Nilsson

CMS Forex

Greenback Rises on Rate Hike Hopes

• The dollar rallied against its rivals Tuesday after Treasury Secretary Henry Paulson said a strong dollar is “really very important” and Federal Reserve Bank of Philadelphia President Charles Plosser said interest rates should be raised “sooner rather than later.” Greenback was also supported by falling commodity prices and rising US equity prices. Today’s US economic data were bleak as housing prices fell more than forecast and the Richmond Fed manufacturing index showed manufacturing contraction in the central Atlantic region. The Canadian and Australian dollars were pressured by dropping commodity prices. Crude oil for August delivery touched $125.63, the lowest level since June 5. The yen and Swiss franc declined on increased risk appetite as US stocks rallied.


• The EUR/USD fell the most since June 3 after Paulson calmed fears of a US financial-system meltdown and predicted US lawmakers would pass a bill this week to support the troubled mortgage giants Fannie Mae and Freddie Mac. The pair traded close to its all-time high earlier after results from Wachovia failed to meet market forecasts. The EUR/USD is testing important support from the short-run uptrend and the 1.58-handle support. If this support is broken, the pair may fall to 1.56 or even 1.54.

Financial and Economic News and Comments

US & Canada

• US home prices dropped 4.8% y/y, the fastest pace of the year in May, following April’s 4.6% y/y decline, the Office of Federal Housing Enterprise Oversight said. May home prices fell 0.3% m/m.

• The Richmond Fed seasonally adjusted manufacturing index fell to -16 in July from -12 in June, the Federal Reserve Bank of Richmond said. Among the index’s components, shipments lost twelve points to -23, new orders declined four points to -17 and the jobs index rose seven points to -5. The index of expected shipments fell eighteen points to -4 and the new orders indicator lost twelve points to finish at -1, indicating manufacturers were less confident about their business prospects for the next six months. Raw material prices rose at an average annual rate of 4.41% compared with June’s 4.74%, indicating price pressures remained elevated in July. Overall, the figures indicate manufacturing activity in the central Atlantic region contracted again in July with manufacturers’ optimism waning.

• Treasury Secretary Henry Paulson, trying to persuade Congress to approve his rescue plan for Fannie Mae and Freddie Mac, cited global stakes in Fannie-Freddie rescue. “This is about not only our housing markets, but it’s about our capital markets more broadly….This goes well beyond the two institutions -- Fannie and Freddie -- it has to do with investors in the United States and investors all over the world,” Paulson said on Bloomberg Television. He believes lawmakers will support his Fannie-Freddie rescue plan, saying at the New York Public Library earlier today “I am confident they recognize the demands of the current situation, and will act to complete work on this legislation this week.” Paulson also voiced support for the dollar, saying a strong dollar is “really very important.”


• Federal Reserve Bank of Philadelphia President Charles Plosser said the Federal Reserve should raise interest rates. “We will need to reverse course -- the exact timing depends on how the economy evolves, but I anticipate the reversal will need to be started sooner rather than later,” Plosser, who argued against cutting interest rates in two Fed decisions this year, said in King of Prussia, Pennsylvania. “It will likely need to begin before either the labor market or the financial markets have completely turned around.”


• Canadian retail sales increased a less-than-forecast 0.4% m/m to C$35.8 billion ($35.7 billion) in May on soaring gasoline costs, after advancing 0.6% m/m in April, data from Statistics Canada showed. Gasoline prices surged 8.8% m/m in May, and adjusting for such price changes, retail sales would have increased just 0.1% m/m, Statistics Canada reported.

Europe

• Switzerland’s trade surplus widened to a record 2.41 billion francs ($2.37 billion) in June from 1.87 billion francs in May, the Federal Customs Office said. Adjusted for inflation and seasonal swings, exports declined 1.8%; imports fell 2.0%.


• Chancellor of the Exchequer Alistair Darling said the global economic slump is “more profound” than predicted. “The effect of what has happened is going to be far more profound than people predicted even at the turn of this year,” Darling said on Bloomberg Television. “It is quite clear that if you look during the course of this year, conditions have become more difficult across the world.”


• European Central Bank executive board member Lorenzo Bini Smaghi said the ECB’s main refinancing rate isn’t “exactly restrictive” at 4.25%, Italian daily publication La Stampa reported.

Asia-Pacific

• Japan’s all-industry activity index continued to expand in May, increasing 0.4% m/m, in line with expectation but below April’s 0.8% m/m rise, according to data from the Japanese Ministry of Economy, Trade and Industry. The all-industry activity index declined 0.5% y/y in May after increasing 0.3% y/y in April. The tertiary industry index contracted 0.2% m/m in May after climbing 1.9% m/m in April.


• East Asia’s economies will grow 7.6% in 2008, the slowest pace in 5 years, less than a December estimate of 8.0%, the Asian Development Bank said. Growth in 2009 is also forecast at 7.6%.

FX Strategy Update

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Published on  Wed, Jul 23 2008, 22:56 GMT

Archive

• Dollar Edges Higher
  Published On Wed, Aug 20 2008, 22:44 GMT
• Greenback Falls as Inflation and Housing Starts Worsen
  Published On Wed, Aug 20 2008, 00:07 GMT
• Dollar Overbought
  Published On Tue, Aug 19 2008, 00:55 GMT
• USD Rally Continues
  Published On Sun, Aug 17 2008, 21:32 GMT
• Dollar Index Penetrates Downtrend
  Published On Thu, Aug 14 2008, 22:59 GMT

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