Expert Analysis of Today's Market

Dollar Falls on Rate Cut Speculation

Hans Nilsson 2008-01-28

The dollar fell against most key currencies on Monday as investors increased bets the Federal Reserve will aggressively lower interest rates by 50 basis points at the Jan. 30 FOMC rate decision meeting to boost US economic growth. Larger-than-expected falls in US new home sales and home prices increased the chance of another large Fed rate cut, following the 75 basis-point emergency cut earlier this month. Interest rate futures showed nearly 90% chance of a 50 basis-point Fed rate cut. Furthermore, before becoming Fed Chairman, Ben S. Bernanke argued for rapid rate adjustment when needed.

The EUR/USD is testing the 1.48-handle resistance supported by better EMU growth and interest rate differentials. The pair is at its highest level in almost two weeks as traders increased bets the Fed will cut its benchmark lending rate to 3.0%, or 100 basis points below the ECB’s key interest rate. Interestingly, the pair has not rallied more despite the bearish US news the last few weeks. There is support in the 1.45-1.46 area.

Financial and Economic News and Comments

US & Canada

US new home sales fell a more-than-expected 4.7% m/m in December to an annual rate of 604,000, the lowest pace since February 1995, from a downwardly revised 634,000 rate in November, the Commerce Department said. The median price of a new home fell to $219,200 in December, the lowest since 2004. The ratio of new houses for sale to houses sold rose to 9.6 month in December, from 9.4 in November, as sales fell at a faster rate than the inventory of houses for sale.

Europe

The average cost of a home in UK fell 0.3% m/m in January, the same rate as in December, to £174,700 ($346,000), Hometrack Ltd reported. The average selling time rose to 8.5 weeks, the most since the survey of real-estate agents and surveyors began in 2001. Home prices increased 2.3% y/y and the supply of homes for sale fell 4.6% m/m in January.

Asia-Pacific

Japanese corporate goods prices rose 0.4% m/m and 2.6% y/y in December, while corporate service prices were unchanged in December but rose 1.4% y/y.

FX Strategy Update

2008
January | February | March | April

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