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Thursday November 18, 2004 - 19:22:32 GMT -

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Forex: Dollar Rallies on Pre-Greenspan Profit Taking Despite Weaker US Data

DailyFX Forex Fundamentals 11-18-2004

By Kathy Lien, Chief Strategist of

· Russia Announces Decision To Increase Euro Reserve Holdings
· Dollar Rallies on Pre-Greenspan Profit Taking Despite Weaker US Data
· Pound Weaker On Disappointing UK Retail Sales Report


Profit taking ahead of tomorrow’s speech on the euro by Greenspan, Trichet and Iwata has brought the euro back below 1.30 against the US dollar. The price action is very interesting considering the significance of the news released earlier this morning. The Russian central bank said that the fall in the dollar has forced them to consider diversifying their reserve holdings. Increasing trade with Europe also gives further justification for this shift. The central bank currently holds 60% of their reserves in dollars and 30% in euros. They now plan on changing that composition to 60% euros and 30% dollars. Russia’s current reserve holdings are approximately USD113 billion. Therefore the shift in reserve composition will clearly be a sizeable amount. This should be fairly bearish for the dollar and bullish for the euro as Russia’s decision could set a precedent for future reserve reallocations by other central banks around the world. There already has been talk of Japan and China also possibly diversifying their holdings to include more euros. This could have massive ramifications for the FX markets. Meanwhile the Italians appear to be very concerned about euro strength. If you recall, they were one of the first to call for intervention. Today, Italian Deputy Minister Urso said that he wants to see the EURUSD between 1.05 and 1.10 and that it is currently beyond their threshold of alarm at 1.30. Today’s modest retracement should provide the Italian government with minimal comfort.


This week, we have seen a massive decoupling of the relationship between US data and the US dollar. The dollar sold off earlier this week despite stronger Treasury International Capital flow data and CPI. Today, the dollar rallied on weaker jobless claims, leading indicators and Philly Fed. Leading indicators fell –0.3%, which is the fifth consecutive monthly decline. Although the series of consecutive declines is a bit concerning, it is falling from the summer’s elevated levels. The Philly Fed index retraced from 28.5 to 20.70. Although the decline was driven by weaker new orders and prices paid, the overall release was not that bad given the improvement in the employment component and the significant jump in the expectations component of the report (from 27.6 to 52.1). Meanwhile across the Atlantic, we are hearing conflicting comments from the Swiss National Bank. On Tuesday, SNB President Roth said that there “is no reason to keep the short-term interest rate level so-close to zero.” Swiss franc bulls found comfort in the upward trajectory of Swiss interest rates. Today though, SNB Directorate member Hildebrand poured cold water on those same expectations when he said that, “growth was unlikely to accelerate into 2005.”


The British pound took a dive as consumers spent less during the month of October. We are finally seeing evidence of weakness in the two components of the UK economy that have stood firm throughout the broader economic slowdown – the labor market and consumer consumption. If you recall yesterday, we saw the first reports of increasing unemployment in over a year. Today, we learned that consumers are finally cutting back on spending after the 1.1% surge in September. With five qinterest rate hikes and a housing market slowdown, it was only a matter of time that would affect consumer spending. Mortgage lending fell for the first time on an annualized basis and decreased for the third consecutive month. The latest housing market data confirms that a slowdown is clearly occurring in the sector and as such, we are moving further away from the bubble conditions that were created over the past few years.


The dollar retraced some of yesterday’s sharp losses against the Japanese yen on continual warnings from Japanese Finance Minister Tanigaki that Japan must take appropriate actions if FX moves become too rapid. Bank of Japan Governor Fukui also noted that they are watching the forex markets with caution. Meanwhile as expected, the Bank of Japan left monetary policy unchanged and downgraded their assessment of the Japanese economy for the first time since May 2003. Although the BoJ insists that the economy is continuing to recover, they noted that “the increase in exports and production seems to be coming to a pause.'' We continue to believe that the risk of intervention only exacerbates at current levels. We suggested yesterday that the Ministry of Finance may be on hold as they wait 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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AA: Major, A: High, B: Medium

Tue 17 July 2018
AA 08:30 GB- Employment
A 13:15 US- Industrial Production
AA 14:00 US-Powell Testimony
Wed 18 July 2018
AA 08:30 GB- CPI
A 12:30 US- Housing Starts/Permits
AA 14:00 US-Powell Testimony
Thu 19 July 2018
AA 1:30 AU- Employment
AA 08:30 GB- Retail Sales
A 14:30 US- EIA Crude
A 12:30 US- Weekly Jobless
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A 12:30 CA- CPI/Retail Sales

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