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Wednesday November 17, 2004 - 22:41:32 GMT -

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Forex: Euro Above 1.30 On Snow Comments

DailyFX Forex Fundamentals 11-17-04

By Kathy Lien, Chief Strategist of

·Euro Blows Past 1.30 On Snow Comments
·Dollar Yen Falls to Weakest Level in 7 Months
·Stronger US CPI and Industrial Production Provides No Respite For Dollar


It was only a matter of time that the euro would rally beyond its previous high of 1.3005. Today’s surge higher was brought on by comments from US Treasury Secretary John Snow in London. He confirmed the market’s worse fear, which was that the US government has no intentions of backing collaborative intervention. Although Snow reiterated the US’ strong dollar policy, he said that the current account should be a “shared responsibility” and it will be something that the US will address. He also added that the “history of efforts to impose non-market valuation (or intervention) on currencies is at best unrewarding and checkered.” Essentially, Snow, like his peers at the Federal Reserve have given the dollar the green light for further weakness. All that ECB officials have been able to do at this point is express their continued discontent. In our opinion, even though the ECB believes that intervention without the collaboration of the US will not be effective, we believe otherwise. If the ECB decides to intervene alone, it would send a strong message to the market that they are not willing to tolerate further euro strength and refuse to be at the whim of their neighbors across the Atlantic. With the euro at all time highs, the best benchmark is the USD/DEM. This is the first time since 1996 that the USD/DEM has fallen below the 1.50 level.


The dollar continued to sell off despite stronger than expected consumer prices, industrial production and capacity utilization. Consumer prices grew by the same pace that it did in May, which was actually the fastest pace of growth since April 1999. However, the market was actually hoping that CPI would exhibit the same strength that yesterday’s PPI report reflected. If you recall, PPI grew by the fastest pace in 12 years during the month of October. The relatively tamer CPI growth indicates that producers have had difficulty passing over higher costs onto consumers. Core CPI growth slowed from 0.3% to 0.2%, which confirms the Fed’s opinion that inflation and inflationary pressures remain contained. Industrial production grew by 0.7% in October, while capacity utilization increased to 77.7%, which is reflective of the tightest level of spare capacity since June 2001. Further dollar weakness was also stirred by the expectations that there will not be any statement on recent currency movements following this weekend’s G20 Summit. However, we doubt that the Finance Ministers will be able to avoid discussing the topic altogether. Although tomorrow’s Philly Fed index is the next event risk on the calendar, the market will probably be paying more attention to Greenspan’s speech on Friday.


Dollar bearishness was en vogue once again with the British pound advancing further against the greenback as U.S. Treasury Secretary John Snow spoke on economic growth in London’s Chatham House. Seeing intervention as “unrewarding” and “checkered” at best, Snow’s comments accelerated the dollar’s decline in light of weakening UK employment data released during the session. Although remaining low at 2.7 percent, the change in unemployment comparatively increased for the second month in a row. This may suggest a reversal of trend as the labor market was seen rather stretched as of late. Coupled with declining housing prices and tame inflation, it is no wonder the Bank of England decided to keep benchmark rates at their current 4.75 percent level. However, with energy costs rising since the beginning of the year, consumers have seen prices advance slightly as earnings looked to have dipped for the time being. As a result, sales receipts may be adversely affected as individual’s find their disposable income minimized.


The dollar has fallen to the weakest level against the Japanese yen since April of this year. Although dollar weakness continues to dominate price action in the pair, comments by a BoJ official in a Japanese newspaper could have provided the additional catalyst that the yen may have been waiting for to break below the 105-level. The official suggested that the strong yen might not be a major risk to the Japanese economy at this point. However, this contrasts with the comments made by MoF officials. Just today, Japanese finance minister Tanigaki warned that, "If there are rapid (yen) moves, we will take firm action.” The question really is a matter of when. The patience of the MoF could be due to fact that current speculative positioning in the Japanese yen is far from extreme levels. The MoF may be waiting for speculative positioning to reach the levels that it did between September 2003 and February 2004. As one of the central banks that are most in tune with market positioning, the MoF typically wants to get the most bang for its buck and wait for speculative positioning to reach extreme levels in hopes that the move following their intervention efforts to buy dollars would be exacerbated by short covering.


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