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Wednesday January 25, 2006 - 22:36:29 GMT

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Forex: Dollar Extends Rally Despite Weak Home Sales Report

DailyFX Fundamentals 01-25-06

By Kathy Lien, Chief Strategist of

• Dollar Extends Rally Despite Weak Home Sales Report
• Bank of England votes 8-1 to Leave Rates Unchanged
• Japanese Ministry of Finance Seeing Improving Economic Activity

US Dollar

Another day, another bout of strength for the US dollar. The dollar’s strongest performance today was against the Japanese Yen while its weakest was against the Euro and Swiss Franc. Trading has slowed to a crawl after lunchtime in the US session. Over the past few days, any interesting price action has been confined to the European / US overlap and the opening of Asian trading. It seems that there has been a lot of two way action here in the US where bulls and bears both can’t agree on where the dollar should be headed next. Instead, it is the conviction of European and Asian traders that have been able to give the market a bit of direction. The greenback barely budged despite the disappointing existing home sales report. For the third month in a row, existing home sales have weakened. According to the National Association of Retailers, home sales increased by an annualized rate of 6.6 million in December, which is 3 percent less than the previous year and the lowest level since 2004. The average price of homes also saw the smallest year over year rise since last March. Higher interest rates are clearly the culprit as mortgages become less attractive. If Friday’s new home sales report comes in just as bad, then there is not refuting the weakness that we are seeing in a sector that represents the backbone of the US economy. However with the risk of durable goods coming in stronger tomorrow, we could see an extension of today’s dollar’s rally. Even though the market’s forecast is for orders to only increase by 1.0 percent in the month of December, strong aircraft orders received by Boeing is expected to drive the overall figure even higher. Therefore, we could very well see the dollar retrace another 75 to 100 pips against the Euro. However, as long as the EUR/USD continues to hold above 1.2150, the breakout that we saw on Monday is still valid.


Dollar bullishness was so broad based today that even a surprisingly strong German IFO index failed to help the Euro sustain its morning gains. Given the recent signs of recovery in the economy, business confidence increased from 99.7 to 102 in December, which is the best reading that we have seen since in five and a half years. Improvements were seen in both the expectations and current conditions component of the survey. French business confidence was unchanged, highlighting the underperformance of France over Germany. More talk that Iran may be moving funds around has now hit the Euro. According to an article in the Financial Times, Iran pulled reserves from Italy after a court ordered the “Banca Nazionale del Lavoro to freeze an Iranian government account over Iran's alleged culpability for the deaths of three Americans at the hands of Palestinian militants in Israeli-occupied Gaza.” Although this is not directly tied to possible sanctions, it does illustrate the country’s willingness to pull funds if threatened with a freeze. Comments from ECB Trichet also failed to help the Euro. The ECB President felt that recent data has confirmed the central bank’s growth outlook, but he was “pragmatic” about rates, which if you recall is a downgrade from the “vigilant” attitude that he held a few months prior.

British Pound

Like the Euro, the British pound only lost ground slightly against the dollar. Stronger growth in the fourth quarter helped to keep the currency well supported. GDP increased 0.6 percent from 0.4 percent which compares to the market’s 0.5 percent forecast. A 0.9 percent rise in services output helped to push overall growth higher, which is certainly to have pleased the optimists that are calling for stronger growth this year. The minutes from the latest Bank of England Monetary Policy meeting was also slightly bullish. The market had expected one other member to join Nickell as a dissenter calling for a rate cut, but none did. This left the vote at 8-1 in favor of leaving rates unchanged at 4.50 percent. Most members felt that growth will continue at its average pace for the next few quarters and that inflation would remain in line with the target. The only risk was to business investment and exports. Given this clear explicit warning, we too will be paying extra special attention to those figures. Should investment and exports continue to falter, we know that more members of the central bank could join Nickell in calling for a rate cut.

Japanese Yen

The dollar has strengthened against the Japanese Yen today which at first glance may seem quite peculiar. However, given all of the margin calls that happened over the past week, it is not surprising to see some repatriation by foreign investors. The Nikkei looks to have clearly topped out and today’s failure to extend the recent recovery may have some Japanese stock market traders looking to cut losses and run. Lingering mergers and acquisition flow from Toshiba’s $5 billion bid for Westinghouse earlier may also be pressuring the Japanese Yen. Like the UK, slightly bullish minutes from the recent monetary policy meeting failed to lift the Yen. According to the group, all 11 regions are seeing expanding activity at the same time since 1997.


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