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Tuesday April 26, 2005 - 21:04:20 GMT

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Forex: Red-Hot Housing Market Fuels Dollar Rally

DailyFX Fundamentals 04-26-05

By Kathy Lien, Chief Strategist of

· Red-Hot Housing Market Fuels Dollar Rally
· Pound Sells Off On Nigeria’s Possible Loan Default
· Yen Gives Back Gains With Deflation In The Air

US Dollar

The red-hot housing market here in the US is providing a strong cause of optimism ahead of next week’s Federal Reserve monetary policy meeting. Although yesterday’s existing home sales report also showed improving conditions, new home sales has been leading the pack. Across the nation, developers have been tearing down existing homes and replacing them with new multiple dwelling complexes. The 12.2% rise to 1.431 million has been driven by low interest rates and steady employment growth. This new trend has made it a banner year for the housing market with today’s report reflecting the strongest annualized new home sales growth on record. In fact, home sales, which tends to take the back seat to the US consumer confidence report actually steered the dollar for most of the day. The market completely shrugged off the 5.3-point drop in consumer confidence. This is the third consecutive month of more pessimism amongst consumers who are certainly frustrated with the sharp rise in gasoline prices during the month of March. Yet, there is reason for the market to focus more on the housing market than confidence. The rise in new home sales confirms that the Fed’s work is far from done while the relationship between confidence and consumer spending has broken down over the past year. The index averaged 96 in 2004, when consumer spending increased by the most in four years.


Although weaker Eurozone economic data provided less of a cause for optimism in the euro, the straw that broke the camel’s back was once again US economic data and reports of another month of healthy growth in US housing market. Despite 175bp of tightening, the latest homes sales report suggests that the Fed’s rate hikes have done little to slow the sector’s impressive growth. Germany in contrast is still struggling with the country’s six leading economic institutes slashing their forecasts for GDP growth. The group predicts that the German economy will expand by 0.7% this year, compared to the 1.5% forecast made last October. With the highest level of unemployment since World-War II, weak domestic demand and oil prices above $50 a barrel, the downgrade in German growth was far from surprising. The ECB has been unable to fuel growth by reducing interest rates because of high inflation. This morning’s report that German import prices rose by the most in four and a half years certainly doesn’t help the ECB’s efforts to boost domestic activity. Tomorrow, the market will turn its focus over to France – we are expecting the PPI and business confidence indicator.

British Pound

The British pound was dealt a triple blow causing it to sell off for the second consecutive day against the greenback. CBI industrial trends orders fell by the largest amount in 2 years with the balance of total orders decreasing from –13 to –24. The group’s chief economic advisor blamed the deterioration in orders on the strength of the pound and high oil prices. Meanwhile, talk of a possible “Argentinian-style” default on its loans by Nigeria is also putting a large dent on the British pound. Britain is Nigeria’s largest creditor, lending them over $33 billion dollars, which accounts for 21% of the country’s total debt. According to the Guardian UK, Britain has been supporting an initiative to “use Nigeria’s windfall from higher oil prices to pay the creditors a fraction of what they are owed.” This would allow the creditors to at least reap 30 cents for every dollar owed instead of nothing. The third dose of pound negative news to hit the wires today was news from Barclays of their planned offer to acquire a 60% stake in a South African company - this offer could total up to $5 billion US dollars.

Japanese Yen

The Japanese yen finally gave back some of its gains with the smell of deflation in the air. Although headline consumer prices increased 0.1%, prices declined 0.2% on an annualized basis. The fall was even sharper on a core level nationwide and in Tokyo specifically. Weak domestic demand has prevented Japanese corporations from raising prices. This will force the Bank of Japan to push out its forecast for the end of deflation to a later date. The labor market is also continuing to deteriorate with employment falling for the second month in a row during the month of March. The jobless rate did improve, but that was only a function of an aging population and declining labor force. The weak labor market has also hurt workers’ household spending and incomes, which fell 1.1% and 3.4% respectively. Taking a step back, even though today’s data painted a pretty dismal picture for the Japanese economy, looking on the bright side, the pace of deterioration is an improvement from February.


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