dollar fell against the yen, euro and GBP before U.S. government housing and inflation reports

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Dollar falls against the majors before housing inflation data

The U.K. currency is poised for a fourth weekly decline, the most since December

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Dollar heads for gains against the Euro before consumer sentiment data

The USD is officially trending upwards, having appreciated over 7% against the Euro in only a few weeks. Of course, hindsight is 20/20, and some analysts now claim that support for the Dollar had been building for several months. They point out that the first break for the Greenback came in March when the Fed stopped lowering interest rates. Then, at a meeting of the G8 nations, several high-ranking officials indicated that they were unhappy with the recent decline of the Dollar and suggested that coordinated intervention should be effected in order to prevent a further collapse of confidence. While this “verbal intervention” was ultimately not backed by any kind of substantive action, investors apparently took the hint.

Further comments by America’s Federal Reserve Bank and the Secretary of the Treasury made clear that the US remained committed to the Strong Dollar Policy. A reprieve in the rise of commodity prices, followed by the proposed bailout of the two cornerstones of American’s sprawling mortgage industry, convinced currency traders that the world’s economic policymakers simply would now allow the Dollar to fall further. Lo and behold, the Dollar failed to break through a resistance level at $1.60/Euro (near a record low), and has since rallied sharply. The International Business Times reports:

It seems that that the big money had committed to a long Dollar, and was waiting for the economic slowdown to spread to the Euro Zone. Once the Euro Zone began to experience a slowdown, it just became a matter of time before the short positions that had been built for several months would pay off.

Read More: U.S. Dollar Takes Control of Forex Markets

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USD Reclaims Dominance

EUR/USD Ratio: 1.25 Signal: Bearish

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Forex Traders Accurately Predicted breakout, Now Signal Consolidation

Implications: Bearish

Source:
COT 08/12

European Central Bank President Jean-Claude Trichet said on Aug. 7 that growth will be “particularly weak”

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While not yet in the same league as other popular emerging market currencies, the Brazilian Real and Mexican Peso are sure to join their ranks soon; both currencies have risen markedly over the last few years, and have performed especially well in the year-to-date. They have been propelled by interest rates that are generously high, especially compared to those of the US and EU. Brazil’s benchmark rate currently stands at 13%, while Mexico’s equivelent rate is slightly lower, at 8%. In fact, interest rates are quite high throughout the region, including in Peru and in Chile. Anlaysts expect most of these Central Banks will further tighten their leding rates because of surging inflation, which would provide further impetus to the upward marches of their respective currencies against the Dollar. Reuters reports:

“We see EMEA (European, Middle Eastern and African) central banks as reaching the end of their (monetary) tightening cycles, whereas there is still more to go from Latin America,” wrote Barclays Capital.

Read More: Latam inflation eyed for currency impact

Originally posted here:
Inflation Drives Latin American Currencies

Trichet’s warning minutes later that his priority is preventing the fastest inflation in 16 years from becoming entrenched

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The ECB may keep the interest rate at 4.25% for a year

In historical periods of financial crisis, where did investors turn? The answer: the US. Some analysts thought that this logic would be turned on its head during the current credit crisis, since the reputation of the US as investing safe haven would surely be undermined by its role in the global economic slowdown. Over the last couple weeks, however, investors have returned en masse to US capital markets, sending US equities as well as the US Dollar to new highs. This has created a self-fulfilling cycle whereby a more valuable Dollar is driving commodity prices lower, which in turn, will benefit the US economy and drive the Dollar even higher. Perhaps the new logic is not so different from the old: that although it was the US that is primarily responsible for the credit crunch, it is also the US which is most likely to lead the global economy out of it. The Los Angeles Times reports:

Whether we come out of this first remains to be seen. But some grim
economic data from Europe and Japan in recent weeks at least confirm
that the slowdown has gone global. In that sense, the U.S. is the devil
you know.

Read More: Homecoming time: Money pours back into U.S. markets

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Money Flows Back into US

The Canadian Dollar continues to lose its luster. Falling natural resource prices and the credit crunch have combined to exact a devastating blow on the Canadian economy, causing it to actually contract in the most recent month for which data is available. Now, the Central Bank is predicting that the economy will expand by only 1% in 2008. Most economists expect that Canadian Monetary Policy will soon lag US policy, especially if the Fed raises interest rates to combat inflation. Based on these developments, the consensus is that the Canadian Loonie is significantly overvalued, and will lose some of its value over the next few years, falling to a more sustainable level against the US Dollar. Bloomberg News reports:

The loonie will slide to C$1.05 by the end of December, and
to C$1.09 by the start of 2010, according to the median estimate
of 31 strategists surveyed by Bloomberg.

Read More: Loonie Loses Currency Wings as Canada Hurt by U.S.

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Analysts: Loonie to Fall

The U.S. currency was also close to a seven-month high against the yen as crude oil traded near a 14-week low

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Dollar trades on a high against majors on low oil prices

As the Chinese Yuan has appreciated over the last three years, and even in the decade leading up to the sudden revaluation, a tremendous amount of speculative “hot money” poured into China. Periodically, the government and Central bank have attempted to stem some of these inflows by creating deliberately unfavorable conditions for foreigners to invest in China. Witness the unnaturally low interest rates and the one-way convertibility of the Chinese Yuan. Now, with inflation running at a 10-year high, the government is becoming more serious in its efforts to clamp down on some of the factors that are driving demand. As a result, it altered its system for governing forex and will increase its oversight over the entities and businesses that import capital into China. If executed properly, much of the upward pressure on prices, and the RMB itself, could be relieved. Reuters reports:

NEW RULES: China operates “a managed float exchange rate
system based on supply and demand”.

OLD RULES: China has “a single exchange rate system” with the
central bank announcing the yuan’s value against major
currencies on a daily basis.

Read More: China’s new forex rules

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China Adjusts Forex Rules

The greenback’s surge against the European currency this month was enough to prompt Bank of America Corp. to tell its customers to exit trades betting on more gains

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The euro also fell to a three-week low versus Japan’s currency after ECB President Jean-Claude Trichet said economic growth will be “particularly weak”

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The parallels between the Australian Dollar and the Canadian Dollar are remarkable! Both currencies are backed by economies highly dependent on natural resources. Both countries’ Central Banks are considering rate cuts in response to slowing growth. Finally, both currencies have slipped well below parity with the US Dollar. Unlike the Canadian Loonie, the AUD had never quite breached the mythical 1:1 level with the USD. Furthermore, given the deteriorating economic picture in Australia, parity is off the table for a long time.

Demand for Australia’s vast natural resources had begun to taper in response to rising prices, and now that prices have softened, exports are off even more. The Central Bank of Australia is indicating that it considers this drop in demand more of a threat than rising inflation. Accordingly, it will attempt to cushion the blow by lowering rates, perhaps as soon as next month. The Australian Dollar’s status as a beneficiary of the carry trade- because of the lofty 7.25% benchmark interest rate- may soon come to an end. Bloomberg News reports:

Investors have increased bets the central bank will cut borrowing costs. [It] will lower the benchmark rate by 91 basis points, or 0.91 percentage point, in the next 12 months, showed [one index].

Read More: Australia Signals First Rate Reduction in Seven Years

Excerpt from:
AUD: So Much for Parity