Expert Analysis of Today's Market

Risk Appetite Pressures Dollar and Yen

Hans Nilsson 2008-02-12

The dollar fell versus the euro and pound but rose against the yen on Tuesday. Risk appetite returned to the FX market after Warren Buffett, chairman of Berkshire Hathaway Inc., said he offered to reinsure $800 billion of municipal liabilities. The yen fell on renewed carry-trade interest as Buffett’s offer boosted US equities. The dollar block currencies and Swiss franc were little changed. Sterling gained after UK inflation rose slightly more than expected.

The EUR/USD rose after German February investor confidence unexpectedly strengthened. The 1.45-handle resistance was broken, now acting as support. Significant support exists in the 1.43 area. The pair is testing the 1.46-area resistance. If this is broken, the pair may test the important resistance from the triple top in the 1.49 area.

Financial and Economic News and Comments

US & Canada

Federal Reserve Bank of St. Louis President William Poole said the US will probably avert a recession and that the Fed’s interest-rate policy is appropriate for the slowing economy.

Europe

The ZEW index of investor and analyst expectations for the next six months unexpectedly rose to -39.5 in February from the 15-year low of -41.6 in January. However, the current situation gauge fell to 33.7 in February, the lowest since September 2006, from 56.6 in January.

German Finance Minister Peer Steinbrueck said: “The European and German economy is very robust….We are not facing a recession. We are facing a slowdown of economic development.”

UK consumer prices rose 2.2% y/y and fell 0.7% m/m in January, the Office for National Statistics said. Core inflation increased 1.2% y/y and retail prices rose 4.1% y/y in January.

Asia-Pacific

Australian business confidence fell in January to the lowest since September 2001 as the stock market had its worst start in 20 years and the Reserve Bank of Australia has been increasing borrowing cost. The NAB business confidence index dropped 9 points to -4 in January, according to National Australia Bank. A reading below zero indicates deteriorating business conditions. Today's report highlights the danger of the RBA’s restrictive monetary policy. The business conditions gauge fell to 13 in January from 17 in December.

FX Strategy Update

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