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Snow Is Finally The Dollarís Savior

DailyFX Forex Fundamentals 01-07-04

By Kathy Lien, Chief Strategist of

∑ Snow Is Finally The Dollarís Savior
∑ US Non-Farm Payrolls Increase A Less Than Expected 157k
∑ Weak Data Continues to Drive Euro Lower


The euro ends the week down 3.8% or 520 pips, its weakest performance against the dollar since its inception in 1999. The battle between US growth and deficit continues to unfold with growth clearly taking the reins this week. Option expiries and comments by US Treasury Secretary Snow added to bullish dollar momentum today, despite a disappointing non-farm payrolls report. In an interview with CNBC, Snow reiterated the USí strong dollar policy and said that one of the US Administrationís top priority is to reduce the fiscal deficit. Although these are comments that he has made previously, this time, he elaborated by laying a possible solution. He said that the President's budget proposal due in early February would contain a strong dose of fiscal discipline. Whether his words are followed through with sufficient action remains to be seen. Next week however may bring some more two-way risk as the busy US economic calendar includes the trade balance, retail sales, producer prices and industrial production. The Eurozone is not far behind with GDP reports and estimates expected, as well as inflation data. Evidence thus far points to slower growth with retail trade flat in the month of November and growing only 0.4% yoy. German factory orders also took a sharp plunge, falling 2.3% mom.


Although the marketís attention was centered on the US non-farm payrolls report, the disappointing release did not stop the dollar from extending its impressive weeklong rally. US corporations added 157,000 jobs in December, 18,000 less than the consensus forecast. However, revisions to the October and November data added another 34,000 more jobs to the economy, capping 2004 as the best year for job growth since 1999. Even though the report was disappointing, what matters is that 150,000 jobs are still respectable and ultimately, it will not change the outlook for the Fedís monetary policy. Comments from US Treasury Secretary Snow accelerated the dollarís second leg higher. Reflecting on this weekís data, we learned that the Fed is more hawkish on the inflation outlook from the FOMC minutes released this past Tuesday, job growth is continuing, and the US government reaffirmed their plans to reduce the federal budget deficit. However, for the dollar rally to continue, the market needs to make up its mind about what is more important Ė growth or the deficits. Meanwhile, consumer credit borrowing fell by a record $8.7 billion in November as auto sales and credit card usage declined. According to the American Bankers Association, consumers are showing signs of being overextended, with overdue payments on consumer loans rising in the third quarter of last year. The market had expected credit growth to increase by $6.0 billion.

With further speculation of a potential interest rate cut by the Bank of England, traders pushed the British pound lower during the session. Once again, previous examples of further declines in housing prices and weaker retail sales exacerbated the shortfall as the U.K. currency crashed through the $1.87 handle to trade at a low of $1.8644. If you recall, housing prices dropped 0.2 percent in November, ultimately rising a paltry 0.1 percent for the three months of 2004. More specifically, according to last monthís RICS housing market survey, prices dropped on a reading of 48 compared with a downside release of 40 in October. Smaller gains in retail sales also added to overall bearish sentiment in light of a decline in unemployment. Statements released by U.S. Secretary John Snow also contributed to downward price action as he reiterated the Bush administrationís strong dollar stance by stating the desire to ďdo things to sustain the strength of the dollar.Ē As a result, the current downward momentum looks to continue further well into Q1 as investors seek a shift in certain factors to warrant a stay on current interest rates by monetary authorities.

Gaining earlier during the session, the Japanese yen appreciated on better than expected household spending. Rising 0.8 percent in the month, this is the first increase in a string of disappointing consumer data for the worldís second largest economy. Additionally, the year on year comparison declined 1.3 percent against consensus expectations of a 1.5 percent decline. The better than expected data seems to have been a product of increased employment activity last month coupled with a dip in the national unemployment rate to 4.5 percent. Unfortunately, the rally was short lived as the market returned to selling off the Japanese currency on confirmation of OPEC production cuts and continued expectations of minimal growth for the fiscal year ending April 1. As a result, the currency hovered around the 105 level with traders anticipating the leading economic index release for November next week in providing any further direction.


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