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Tuesday May 2, 2006 - 21:36:08 GMT

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Forex: Dollar Resumes Slide as Geopolitical Tensions Escalate

DailyFX Fundamentals 05-02-06

By Kathy Lien, Chief Strategist of

• Dollar Resumes Slide as Geopolitical Tensions Escalate
• Recovery in Euro, But Still Signs of Exhaustion
• Positive Economic Data Fuels Fresh Gains in Pound

US Dollar

The recovery that we saw yesterday in the US dollar lasted for no longer than 24 hours before the market started to pound the dollar once again. The greenback sold off against all of the major currency pairs on little news. The only piece of economic data released today was pending home sales and vehicle sales, neither of which is very market moving. Pending home sales fell 1.2 percent which comes in contrast to the stronger existing and new home sales reported last month. Meanwhile there was more murmuring about Bernanke’s recent comments. It seems that we are dealing with clarification over clarification as the market tries to get its hands around the first major comments from the new Federal Reserve Chairman. According to reports, Bernanke’s comments may not have been official comments. Instead, Maria Bartiromo of CNBC said that these were comments made to her by the Fed Chairman at a White House Correspondent Dinner over the weekend. She added that when asked if the markets misunderstood him last week when he signaled that the Fed could pause their rate hikes, he said that he found it worrisome that anyone would consider him dovish. At this point, it all seems like hearsay, which makes tomorrow’s speech by Bernanke an important event to tune into. The one thing that we do know is that even if the Bernanke was not extremely dovish, the Fed is still near the end of their tightening cycle while the pressures on the US dollar continue to grow. With Iran defying the UN and threatening to hurt Israel if the US attacks them, oil prices are on the rise again. The President of Iran has already said that Russia and China, both of whom hold veto powers at the UN have vowed that they would not back any punitive measures on Iran. Tensions are escalating with no clear resolution in sight and unfortunately the greater risk is for further escalation over a peaceful resolution.


After giving back some of its gains yesterday, the Euro continued its climb higher. However the Euro’s inability to break above yesterday’s high suggests exhaustion. As expected, Eurozone economic data is beginning to show signs of weakness and is losing some of its impressive momentum. The region’s manufacturing sector PMI increased from 56.1 to a less than expected 56.7 in the month of April. This is the highest reading since Sept 2000 but slightly weaker than expected. Improvements were seen in French and Italian manufacturing activity but growth remained stagnant in Germany. The country is generally most sensitive to changing global dynamics and was one of the first to see accelerated economic activity. By the same token, they may also be one of the first countries in the region to see slower growth. Yet it is still too early for the Euro to respond, especially since the numbers were still strong and the weaker than expected performance in Germany is far from worrisome levels. With little expected out of Europe tomorrow, the market will continue to hold its breath ahead of Thursday’s much awaited ECB meeting. The market is divided on whether ECB President Trichet will be dovish or hawkish during the press conference. Some, like us argue that the strength of the Euro should have the central bank very concerned while others cite growing inflation pressure and positive economic data as reasons for more hawkish commentary. Unless the central bank President doesn’t say a word, such divided sentiment only tells us that volatility should pick up on Thursday as both camps react to Trichet’s stance. Meanwhile Italian Prime Minister Berlusconi conceded defeat to Romano Prodi. This should put an end to any lingering uncertainty following the close vote back in early April. After driving economic growth to near zero and the budget to very high levels, the market is looking at his resignation as a positive move for Italy.

British Pound

The British pound continued to outperform the US dollar and the Euro. For a generally range bound currency pair, the sharp slide that we have seen over the past four trading sessions is reminiscent of the deep slides that we typically see more often in a trending currency pair like USD/JPY. Economic data released this morning gave sterling bulls a good reason to send the currency higher. Manufacturing activity jumped from 51.0 to 54.1, which compares to the market’s expectations for a modest rise to 51.3. Recent data suggests that economic activity is beginning to pick up. The CBI April retail sales figure dipped into positive territory as it rose from negative 16 in March to positive 2 in April. Mortgage applications are also picking up rising from 57.6k in February to 85.7k in March. Finally, stronger money supply growth is confirming the global notion that inflation pressures are growing. Overall, repeatedly good news throughout the day has kept the British pound very well bid and could also prompt the Bank of England to be a bit more bullish in their Quarterly Inflation report.

Japanese Yen

With the Japanese markets closed for Constitution Day, the first holiday of Golden Week, trading in the Japanese Yen is thinner than usual. For the most part, the majors are recuperating the losses that it saw yesterday against the Japanese Yen. Buying by exporters ahead of the holiday had sent the yen higher across the board. The only currency to extend its losses against the yen was once again the US dollar. Not counting two instances of unchanged price action, USD/JPY has remained under pressure for eight consecutive days. Meanwhile there was no data released last night and there will none released for the remainder of the week. The move in USD/JPY has gotten fairly extended like the moves in many of the other major currencies. However with no major catalyst in sight, it may still be too early to call a bottom.


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