Monday August 11, 2008 - 11:43:46 GMT
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FX Solutions - www.fxsol.com
The Dollar's Excellent Week
When economic fundamentals, central bank rate policy, and
technical analysis align the currency market can experience the rare tsunami
that struck the euro this week.
From Monday to Friday the euro lost 4.0% against the US
dollar, 2.5% against the yen, and 1.7% against the British Pound. Almost all the losses against the dollar and
the pound, (3.3% and 1.5%) and the entire decline versus the yen, occurred
after Jean Claude Trichet the President of the European Central Bank (ECB)
reordered the market view of the Eurozone economy.
European statistics have been failing for several weeks. But
Mr. Trichet moved the euro reconsideration into high gear when he admitted that
the Eurozone economies are in for a very rough few quarters immediately
ahead. Acknowledgement of economic
weakness is a new factor and given Mr. Trichetâ€™s history of letting the markets
know the bankâ€™s thinking and with the second quarter GDP release coming this
Thursday, no currency trader was disposed to take him at anything other than
â€śMuch of the immediate prognosis for the euro will depend on Mr.
Trichet's answers to questions about the Eurozone economy. Strict
inflation talk from Mr. Trichet is expected, but the more he acknowledges
pending economic weakness or cooling inflation the more the markets will begin
to price a rate cutâ€ť. That was the analysis I posted on our website on
Wednesday evening before the ECB rate announcement. And so it turned out.
Mr. Trichetâ€™s commented that â€śwe are indentifying downside riskâ€¦for a
number of months and I would say that the information that we have which are
very, very clear for some of them suggest the materialization of those risks."
He also suggested that Eurozone growth may experience a trough the next two
quarters. Both statements were a clear
warning that the economies of the euro 15 have deteriorated faster than the
central bank expected. Although the ECB
maintained its current base rate of 4.25%, the implications of the new economic
assessment for future rate policy are plain.
The Federal Reserve began its own rate consideration in a
gingerly fashion on Tuesday. The FOMC statement said â€śAlthough downside risks
to growth remain the upside risks to inflation are also of significant concern
to the Committee.â€ť Though the statement was at pains to delineate the economic
problems in the US,
those are well known and have long been priced into the dollar outlook. The
mention of the concern of the committee was new, at least in phrasing. And it seemed to add a note of urgency to the
Fed concerns about inflation.
The Fed has recently been highlighting its view of inflation and
intensified the inflation rhetoric in its Tuesday statement. But it cannot
yet raise rates. The economy is still weak with worrisome if not unknown
risks in the banking, financial and consumer credit and mortgage sectors. High
oil prices are crimping American consumer spending, the engine of GDP.
But the economic outlook in Europe and
future ECB rate cuts were not the only factors weighing on the united currency.
The euro broke three critical technical supports in its week-long descent: the unbroken trend support line at 1.5500-15 which
went back to last August and the beginning of the credit crisis; the
38% Fibonacci retracement at
1.5410-20 of the February to July climb;
the 23% Fibonacci of the entire August to July move at 1.5380-90.
The currency debate between the euro and the US dollar has shifted
topic. It is no longer solely about the rate policy of the ECB and the
Federal Reserve. Although central bank policy is the prime determinant in a
currencyâ€™s value both banks are on long term hiatus. It is not primarily
about the US economy which though weak has not collapsed and has been a story
for many months. The debate is now about the economic health of
the Eurozone and it has been brought to the fore courtesy of Jean Claude
Trichet the President of the European Central Bank. It is a debate the Eurozone
and the euro will lose.
FX Solutions, LLC
Chief Market Analyst
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