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Friday February 8, 2008 - 22:07:45 GMT
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Forex Research - The Risks Facing the US Dollar

Friday, 08 February 2008 21:33:31 GMT

Written by Kathy Lien, Chief Strategist

• Euro Remains Weak as Incoming Data Points to Further Deceleration
• British Pound Holds Onto Losses

The Risks Facing the US Dollar
It has been a quiet day in the currency market with no US economic data released other than wholesale inventories, which was stronger than expected but not market moving. The dollar is slightly weaker against all of the major currencies as retracement and recovery remains the theme of the day. On Saturday, G7 finance ministers will be releasing their communiqué. No major changes to the currency language are expected. Publicly, China will continue to bear the brunt of pressure for exchange rate adjustments but behind the curtains, the US will be called to halt the dollar's slide. In fact, the dollar's weakness has already caused many different groups to reconsider their financial situations. Yesterday, we talked about how the weak dollar is hitting Main Street and today, Reuters obtained an advance copy of an article expected to be published in a London based magazine next week that quotes the OPEC Secretary as saying "Maybe we can price the oil in the euro. It can be done, but it will take time." The US dollar did sell off when the headline hit the news wires but the impact has been small given the significance of this announcement. The lack of a more major reaction may be due to the fact that the article has not been officially released and a move to price oil in dollars will indeed take a very long time because a lot of changes will need to be made including how oil is traded and settled on financial exchanges. This is a big risk for the dollar in the long term because unless we get a major rally, the Euro will continue to chip away at the currency's dominating status. Next week, US retail sales also pose a risk for the greenback. The drop in consumer confidence and decline in chain store sales could lead to another month of negative consumer spending. Recent data out of the US indicates that the economy is in a recession and retail sales can easily confirm or deny that. In addition to the consumer spending number, we are also expecting the US Empire State manufacturing survey, the Treasury International Capital report, Industrial Production and the University of Michigan consumer confidence survey.

Euro Remains Weak as Incoming Data Points to Further Deceleration
The EURUSD has dropped over 350 pips since the beginning of the week. Deteriorating economic data and the European Central Bank's admission that the economy could weaken further has caused many traders to believe that the next move by the ECB will be to cut rates and not to raise them. This morning, Germany reported weaker than expected trade and industrial production numbers while the OECD announced that even though leading indicators in the Eurozone remained unchanged in December, the November number was revised down from 98.4 to 98.1. Next week the main event risks will be the German ZEW survey and GDP. It will be interesting to see how much the Eurozone economy actually deteriorated. The market expects German growth to slow from an annualized pace of 2.5 percent to 1.8 percent and for Eurozone growth to slow from 2.7 to 2.2 percent. Meanwhile Switzerland released stronger numbers. The SECO consumer climate index and consumer prices both beat expectations, which has led to a mild recovery in the Swiss Franc.

Visit the Euro Currency Room for resources dedicated specifically to the Euro.

British Pound Holds Onto Losses
With no major economic data released today, the British pound recovered marginally against the US dollar. Even though the statement released by the Bank of England last week was not as dovish as the market expected, the fear that economic data will deteriorate further and force the Bank of England to continue lower interest rates well below 5.00 percent has prevented the British pound from recovering. Next week there are a lot of UK economic data on the calendar, which means that there will be decent volatility in the pound. We are expecting producer prices, consumer prices, trade balance, employment data and the Bank of England Quarterly Inflation Report. Inflation should be strong, but the labor market is expected to deteriorate further given the strains in the housing and financial markets.

Visit the British Pound Currency Room for resources dedicated specifically to the Euro.

USDCAD Falls Below Parity After Employment Numbers
USD/CAD returned to parity as the Canadian labor markets bounced back in a big way in January, with the net employment change surging a greater-than-expected 46,400 after tumbling 18,700 in December. Meanwhile, the unemployment rate surprisingly fell to a 33-year low of 5.8 percent. As we discussed in yesterday's Daily Fundamentals, the January Ivey PMI reading suggested a solid improvement in these labor market figures. It appears that despite a sharp slowdown in business and trade activity at the end of 2007, conditions improved in early 2008 as domestic demand remains robust. Furthermore, the news indicates that the Canadian economy may be better equipped than previously expected to weather a massive slowdown - or worse, a recession in the US. Next week, the focus will be on the Australian and New Zealand dollars. Australia will be releasing their employment numbers, while New Zealand has producer prices and retail sales due for release. The most important number for Canada will be their trade balance figures.

Tell us what you think on the Canadian dollar Forum.

Carry Trades Stabilize
Despite the fact that US stocks continue to weaken, carry trades are stabilizing. Japanese economic data was mixed with machine orders and the Eco Watchers Survey weaker than expected but money supply and bank lending accelerating. Bank of Japan Governor Fukui gave a speech last night and his comments are a perfect reflection of their lack of commitment to any specific monetary policy. Fukui said that monetary policy will be decided by economic development. With a Bank of Japan meeting scheduled for next week, this tone indicates that no changes will be made. In addition to BoJ, GDP is also expected to be released along with industrial production and CGPI.

Visit the Japanese Yen Currency Room for resources dedicated specifically to the Euro.

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By Kathy Lien, Chief Strategist of DailyFX.com
Contact Kathy Lien about this article at klien@dailyfx.com






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