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Tuesday August 23, 2005 - 21:31:54 GMT

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Forex: Dollar Bulls Keep an Eye on Housing Market

DailyFX Fundamentals 08-23-05

By Kathy Lien, Chief Strategist of

· Dollar Bulls Keep an Eye on Housing Market
· Euro Rallies on Strong Investor Confidence
· Yen Gives Back Gains on Profit Taking

US Dollar

Unlike yesterday when we had a completely empty US economic calendar, today we had the release of existing home sales for the month of July. The health of the housing market is becoming more and more important these days as the market contemplates the potential impact of a housing market collapse. Today’s existing home sales data showed a decrease in sales, but overall the release was still solid. Sales of existing homes fell 2.6% in July, but the decline came off of a record high in June and the overall number of existing home sales is still the third highest on record. What is even more encouraging is that home prices also experienced strong double digit growth. Yet, at a time when you have TV shows called “Flip this House” on A&E and its competitor “Flip that House” on the Discovery Network touting how easy it is to make fast profits in the real estate market, our bubble alarms are definitely ringing at full volume. It is also undisputable that inventories are increasing and it is taking longer for homes to sell. With any product that is losing popularity, the first sign that it is in trouble is that it stays on the store shelves for a longer period of time and inventory just accumulates. The next logical step is for the retailer to cut prices, hoping for a fire-sale. Since inventory buildup is already happening, we know that step one is underway. With prices at such elevated levels and mortgage costs expected to trend higher on the back of more Federal Reserve interest rate hikes, home buyers will become even more wary of chasing the market. Although a substantial contraction in prices is far more likely than a downright crash, any sizeable slowdown in the market could spell disaster for US consumer spending, the US economy and the US dollar, especially in an environment with record high oil prices.


Stronger investor confidence helped to send the Euro higher today with the German ZEW survey leaping to 50.0 from 37.0. The market had actually expected investor confidence to slide marginally in the month of August, but signs of improving domestic demand has increased optimism. Meanwhile confidence in Eurozone growth also rose strongly from 29 to 41.6. The market still needs proof that the economic recovery in Europe is here to stay. Much of stimulus has come from the slide in the Euro and right now, that appears to have come to an end. So it remains to be seen whether the Eurozone can continue to pull itself out of it slump without any additional stimulus.

British Pound

There was relatively no movement in the British pound today as the currency pair was contained within a 50 pip range against the dollar for most of the day. With no economic data yet again, traders seemed content with the inactivity as they await tomorrow’s CBI trends survey, a carefully watched barometer for the manufacturing sector. Previous reports have indicated a confirmed slow down in the sector due to sluggish consumer consumption, ultimately leading the Confederation of British Industry to call for additional rate cut considerations by policy officials. Leading the pessimistic bias, however, were 2005 growth forecasts by the British Chambers of Commerce released earlier today. Previously expecting a 2.4 percent expansion rate in the year, the BCC has lowered their forecast to reflect a further weakening housing market and tepid household consumption. As a result, officials have cut growth estimates to 2 percent, significantly lower than 3 to 3.5 percent stated by Chancellor Gordon Brown. The factors incorporated in the surveys may negatively affect the gross domestic product figures on Friday, leading to speculation of further interest rate cuts. However, with inflation still hovering at the central bank’s benchmark 2 percent rate, a corresponding move may be applied later rather than sooner.

Japanese Yen

Profit taking was the theme in today’s session as traders pared back long yen positions in light of optimistic industry data. According to the June tertiary industry index, spending on services rose in the month spurred by increased consumer demand. Subsequently, the recent rise reverses the massive decline in the previous month and adds to already blooming positive expectations in the land of the rising sun. However, traders more focused on the adverse effects of renewed rises in crude oil prices and waning equities booked profits on the day. Crude oil after remaining relatively stagnant began another move higher, testing the $66 a barrel level in the overnight. The climb lent to fears that growth may be negatively affected given renewed suggestions of upward persistence. Additionally weighing on traders’ minds were fresh highs made by the Nikkei 225. Notably on the session, the benchmark index soared as much as 100 points early in the day only to close 20 points higher at day’s end. As a result, with expectations that near term equity strength may be plateauing and positive sentiment of Koizumi’s reelection already priced in, the underlying currency was due for a minor pullback. However, with several pivotal reports later in the week, the notion of continued strength may not be too far fetched.


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