â€˘ Dollar Sees New Lows After Saudi Arabia Snubs Fed Hike
â€˘ Euro: Finally Breaches 1.40
â€˘ Pound: Retail Sales Strong, Discounts vs. Rate Hikes
â€˘ Dollar: Bernanke and Paulson Ready Their Testimony
In the midst of a busy economic calendar, one unscheduled event finally broke through the dollars defenses. The dollar was hammered by news that the Saudi Arabia Monetary Authority would not cut rates to follow the Fedâ€™s 50 bp easing on Tuesday. This is the first time the central bank has not kept pace with US rates and its defiance sparked fears that the country was preparing to abandon its peg with the dollar. If the worldâ€™s largest oil exporter were to break the peg, it would certainly be a hit for the greenback which has already seen its reserve currency status shaken with China and Russia, among others nations, diversifying away from the dollar. As the news weighed on the market, EURUSD was able to finally break the targeted 1.40 level (see Antonio Sousaâ€™s and Jamie Saetteleâ€™s articles calling for the move).
While the euroâ€™s fresh record highs may have been the headline for the night , it certainly wasnâ€™t the only story. In fact, the British pound had arguably the most fundamentally active sessions. Retail sales crossed the wires with gusto on a 0.6 percent jump over August that flouted expectations of no change. Certainly, strong employment trends and high housing values helped to carry consumer optimism through the July rate hike; but generous discounts - which have seen the price deflator drop 1.0 percent over the year - undoubtedly helped stoke demand. If that is the case, the push and pull between record debt along with rising rates and price discounts can only last so long before pricing managers find their limit.
Speaking of debt and interest rates, BoE Governor Mervyn King delivered his testimony on the Northern Rock situation to the Treasury Select Committee. King said the events of last week concerned policy makers that confidence in the banking system was eroding. However, while he said the trade off between limiting moral hazard and stable markets was forced; the Governor said he would have preferred a change of ownership or covert lender of last resort (LOLR), but legislation prevented these options. And, while the central banker said he would inject an additional 10 billion pounds into the market, he gave no clear indication that rate cuts were on the way.
Looking ahead to the US session, the clear market-moving event will be Fed Governor Ben Barnankeâ€™s and Treasury Secretary Henry Paulsonâ€™s testimony before the Houseâ€™s Financial Services Committee. The American policy makers will likely face the same heat that King felt in his grilling; and we can expect both men to defend their actions vigorously. It will be interesting to see how Bernanke presents himself after losing the respect of many inflation hawks when he voted along with his fellow Board of Governors to take the Greenspan-like action of cutting the Fed Funds rate half a percent, rather than a quarter or no move at all.