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Tuesday December 7, 2004 - 22:01:48 GMT -

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Forex: Increased Speculation Of “Dollar Dumping” Keeps Euro Strong

DailyFX Forex Fundamentals 12-07-04

By Kathy Lien, Chief Strategist of

· Increased Speculation Of “Dollar Dumping” Keeps Euro Strong
· UK Retail Sales Slide In November
· Japanese Consumers Cut Spending
· Bank of Canada Leaves Rates Unchanged at 2.50%

EURUSD - As we forecasted yesterday, the euro continues to consolidate despite a stronger release of the most important piece of economic data expected from the Eurozone this week. The unexpected rise in the December ZEW economic sentiment index for Germany only led to a modest rally in the EURUSD. The retracement in oil prices has led to a rebound in optimism among analysts. However the assessment of the current condtions and expectations for the Eurozone as a whole actually deteriorated in December, led lower by a more pessimistic review for France. Interestingly enough, although ECB Weber said that recent forex moves are “unwelcome,” he also added that euro gains won’t have a sustained effect on exporters. As we have previously suggested, comments from ECB officials have much higher importance than comments from EU finance minsters. Meanwhile, we continue our coverage of “dollar dumping.” Yesterday, we talked about Russia adjusting their reserves and speculation of Chinese, Japanese, and South African central banks doing the same. Today, we point out to our readers the reduction of dollar holdings by oil exporters over the past 3 years. Central banks in the Middle East have exchanged some dollar reserves for euros to avoid incurring losses related to the slide in the dollar. Although the euro was only launched in 1999, it has since become the world’s second most popular reserve currency. As time passes, we expect more central banks to hold an increasing number of euros as they adjust their reserve holdings to reflect their trade flows.

USDCHF - Like in the euro, the dollar is also consolidating against the Swiss Franc. The only official economic data released today from the US was the third quarter revisions to non-farm productivity and unit labor costs. Both releases came out at 1.8%, which was contrary to expectations. However, the data is fairly old and not seen as a huge market mover. Instead, the market turned its attention to the report of layoffs released by outplacement firm Challenger, Gray and Christmas. According to the report, US corporations posted 104,530 job cuts in November, which was a 2.6% increase from the previous month and the third consecutive month that layoffs exceeded 100,000. Today, Colgate Palmolive announced plans to eliminate 12% of their workforce, which is approximately 4,450 people, most of which are in the manufacturing sector. According to the latest non-farm payrolls report, the manufacturing industry has shed jobs for the third consecutive month. The US government probably hopes that the weaker dollar will boost US manufacturing activity and hence jobs in the sector. Volkswagen and BMW have already announced that they are considering building cars in the US due to the dollar’s weakness. Although they are 80% hedged in 2004, they are only 40% hedged for 2005.

GBPUSD - The mighty pound tested 1.95 once again today despite a weaker retail sales report. Same store sales fell –0.2% m/m in November, after rising +0.5% in October. Contrary to last week when we saw a string of stronger UK economic data, this week, both industrial production and consumer spending data has disappointed. The interest rate hikes that the Bank of England has delivered to the economy has been successful in gradually slowing the housing market and overall growth. Layoffs are also beginning to occur in the UK, with BBC announcing their intentions to slash 10% of their workforce or 2,900 jobs. If you recall, the UK economy experienced job losses for the second consecutive month in October. This follows 15 consecutive months of job gains.

USDJPY - There continues to be no clear direction for USDJPY as a day of gains is once again followed by a retracement. Mixed data supports indecision in the market. Houshold spending fell by more than expected in the month of October while both the coincident and leading indicators were reported in line, but still in contractionary territory. A Cabinet office spokesperson was also quoted as saying that “Japan may be entering recession.” However, oil prices continue to recede, which should have lent support to the Japanese yen. GDP due for release later today will receive a significant amount of attention. Disappointing growth could see an upside breakout of the recent consolidation for USDJPY.

USDCAD - In line with the new shift in expectations, the Bank of Canada left interest rates unchanged at 2.50% this morning. Yesterday, we included special coverage on the Canadian dollar in our daily report because the CAD rate decision was to some extent still up in the air since economic data has been relatively mixed. At the last monetary policy meeting, BoC Governor Dodge had hinted at more interest rate hikes to come. However, today, they failed to deliver such a hike, citing concerns that the strength in the Canadian dollar may hurt growth and inflation. They also eliminated any suggestion for future interest rate hikes. If you recall on November 24th, BoC Governor Dodge shocked the markets by saying that he was concerned about the CAD’s impact on growth. We now learn that the concern was so significant that it prompted them to shift their monetary policy stance.


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