Tuesday March 22, 2005 - 10:23:05 GMT
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US OPEN MARKET POINTS 03-22-05
Dollar Euro Pound Await FOMC
As the market awaited news of the FOMC rate decision scheduled for 19:15 GMT today, dollar bears licked their wounds in quiet European trade after the currency gained 200 points against the euro and 280 points against the pound yesterday in a relentless move that broke many key support levels for the two currencies. Yesterday’s rally was fueled by lower oil prices, speculation of a more aggressive monetary posture by the Fed and a report of new liberalized fiscal policy guidelines for the Euro-zone that weakened euro’ s status as an alternative reserve currency by extending deficit finance rules above the original 3% of GDP limit.
Although almost all the market participants expect a 25 basis point hike, opinion is mixed as to whether the Fed will drop “measured” from the language. Regardless of the tone, the actual fact is that US rates are inexorably headed up. While at first glance this may appear positive for the dollar bulls it could easily develop into a nightmare if US Trade deficits do not recede from their record pace. Under such scenario, dollar weakness will continue while US bonds will decline as interest rates rise. As foreigners face losses on both their currency exposure and their capital assets, they may commence a wholesale liquidation of US securities exacerbating the dollar decline.
For these reasons we remain dollar bearish over the long term but believe that the EUR/USD will remain range bound over the short term. We are hesitant to join the euro bulls who are already talking of “great buying opportunities at 1.3100”. One of the great truisms of the FX market is that it always tends to go to extremes. The dollar counter rally that started yesterday will not end in a day and euro bulls are likely to experience a lot more pain before the dollar run is over.
FX Spot Overnight
- EUR trades 20 pips either side of 1.3150 awaiting FOMC
- JPY at 105.10 off weaker Convenience Store Sales
- GBP hovers at 9000 as inflation data muted
- CHF hangs at 1780 in concert with euro
- 13:30 GMT – (08:30 AM EST) USD Producer Price Index m/m Feb Expected 0.3% Previous 0.3%
- 13:30 GMT – (08:30 AM EST) USD Producer Price Index y/y Feb Expected ---- Previous 4.2%
- 13:30 GMT – (08:30 AM EST) USD PPI Ex. Food and Energy m/m Feb Expected 0.1% Previous 0.8%
- 13:30 GMT – (08:30 AM EST) USD PPI Ex. Food and Energy y/y Feb Expected 3.1% Previous 2.7%
- 13:30 GMT – (08:30 AM EST) CAD Retail Sales m/m Jan Expected 0.6% Previous -1.4%
- 13:30 GMT – (08:30 AM EST) CAD Retail Sales Ex. Autos m/m Jan Expected 0.7% Previous -1.1%
- 19:15 GMT – (14:15 PM EST) USD FOMC Rate Decision Expected (Mar 22) Expected 2.75% Previous 2.50%
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