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US Dollar Fights its Way Back

http://www.dailyfx.com/story/bio1/US_Dollar_Fights_its_Way_1216243761759.html

After hitting a record low against the Euro on Tuesday, the greenback is fighting its way back. The fundamental factors that are driving the dollar higher today include falling oil prices, a rebounding stock market, intervention risk and hawkish FOMC minutes. Although each of these factors has the power to turn the dollar around individually, the primary story is oil. Since Tuesday, oil prices have fallen more than $10 a barrel, leaving many consumers and investors hoping that this is a top. Lower oil prices is a big relief for US consumers and businesses, which is why the Dow rose more than 270 points today. Meanwhile the dollar is also benefitting from speculation that the Federal Reserve could intervene to prop up the US dollar. In his testimony this morning, Bernanke said that forex intervention should be done rarely and that USD intervention may be justified in disorderly times. Since most of us would argue that current conditions can be described as “disorderly,” Bernanke may be warning about possible plans for intervention, but we think that is unlikely. According to the minutes from the June FOMC meeting, Fed officials were prepared to raise interest rates “very soon.” They felt that growth risks diminished but inflation was on the rise. However don’t read too much into these minutes given that a lot has changed since June; Growth risks have increased significantly and inflationary pressures or at least inflation expectations are beginning to ease. The same can be said of the Treasury International Capital flow numbers which indicated that even though foreign purchases of US securities fell last month, there is no sign that China or Japan has reduced their holdings of US dollars. In fact, purchases of Fannie Mae and Freddie Mac’s debt actually increased in May. We suspect that the data for June and July will look very different. Finally, other pieces of US data were mixed. Consumer prices raced to the highest level since 1991 on an annualized basis, industrial production was strong but the NAHB housing market index fell to a record low. Given current market conditions, traders should forget about a rate hike from the Fed this year. Inflation is a problem, but the stability of the financial markets; growth and global investor confidence are even bigger problems. If oil prices fall back towards $120 a barrel, the Fed will remain on hold for the remainder of the year.

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Dollar Rally Stalls As Markets Ponder - What's Next?

http://www.dailyfx.com/story/bio2/Dollar_Rally_Stalls_As_Markets_1216286238304.html

EURUSD recovered some of its losses in overnight European trade after an article in Financial Times indicated that Sovereign Wealth Funds in the Middle East were continuing to pare their dollar long exposure. Kenneth Shen, head of the strategic and private equity group at Qatar Investment Authority, noted that “the outlook for the US dollar is a significant issue for investors contemplating US-related investments.”

More troubling was the suggestion in the article that China’s State Administration of Foreign Exchange (SAFE) has been looking to strike deals with private equity firms in Europe as a part of a strategy to reduce its dollar holdings. Chinese have been key buyers of dollar denominated fixed income instruments including bonds from the Fannie and Freddie Mac. Should their appetite for US securities suddenly wane, the greenback could see further selling as fears over financing of US Current Account deficit will resurface once again.

On the positive side the drop in oil below the $135.00 level has been a huge boon for the dollar and US equities and should crude continue to slide towards the $130/bbl mark, the greenback is likely to see more gains in the North American session despite lingering concerns about the stability of the US financial system. With little meaningful news on the calendar, the currency markets continue to be driven by macro rather than micro themes, as oil and equities dominate trade in FX.

Nevertheless, the start of North American session promises to bring more interesting economic data for traders to consider as jobless claims, housing reports and Philly Fed all hit the screen. Jobless numbers are an important barometer of economic health as labor markets will be a critical factor in determining whether the Fed will be able to raise rates this year or not. Last week’s surprising drop to 346K was attributed to seasonal adjustments, so market participants will focus on this week’s data with particular attention. Any print above 400K will once again raise concerns about deteriorating labor markets, while anything close to 350K could provide the greenback with a much needed boost.

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