Expert Analysis of Today's Market

Dollar Falls

Hans Nilsson 2007-07-18

In NY trading Wednesday, the dollar touched new lows against other key currencies after Federal Reserve Chairman Ben S. Bernanke said housing sector problems may last longer than expected and lower US growth. The dollar fell to a fresh all-time low versus the euro. The Canadian dollar set fresh 3-decade peaks against the greenback and the Australian dollar traded at an 18-year high. The yen gained against the dollar and euro as risk aversion increased on lower equity prices.

The GBP/USD rose to a 26-year high today despite dovish-than-expected BOE minutes. The pair is overbought. There is no recent resistance level so it is difficult to predict how high the pair will rise before a correction occurs.

Financial and Economic News and Comments

US & Canada

The US economy will grow 2.25-2.5% in Q4 y/y, compared with a 2.5-3% range given in February, the Fed said in its semiannual monetary policy report to the House Financial Services Committee.

Federal Reserve Chairman Ben S. Bernanke said US economic growth will pick up slightly next year and inflation will gradually recede. “The U.S. economy appears likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008 to a rate close to the economy’s underlying trend,” Bernanke predicted in a testimony to the House Financial Services Committee in Washington. “Core inflation should edge a bit lower, on net, over the remainder of this year and next year.”

Bernanke expressed concern that the slump in the housing market will continue longer than originally expected and that the subprime conditions have worsened significantly. He said delinquencies and foreclosures are likely to get worse before they get better. He also said housing will continue to be a drag on the economy and may start to hurt consumer spending. Bernanke’s comments indicate the Fed monetary policy will be on hold for the foreseeable future.

US consumer prices rose 0.2% m/m and 2.7% y/y in June, the Labor Department said. Energy prices declined 0.5% m/m in June. Excluding food and energy, the core CPI rose 0.2% m/m and 2.2% y/y. Inflation is still on the high side.

US housing starts rose 2.3% m/m in June to 1.467 million the Commerce Department said. The US building permits dropped 7.5% to an annual pace of 1.406 million in June, the lowest in a decade. The drop in permits indicates further housing weakness.

Canada’s inflation rate unexpectedly fell 0.2% m/m in June. The consumer price index rose 2.2% y/y, Statistics Canada said. Core inflation, which excludes volatile goods, accelerated 2.5% y/y.

Europe

Bank of England policy makers voted 6-3 to raise the benchmark interest rate to a 6-year high in July and supporters of the increase suggested they may be prepared to pause before raising rates again.

In response to primarily French objection to ECB’s single goal of stable prices, ECB spokeswoman Regina Schueller said on behalf of ECB President Jean-Claude Trichet that any attempt to influence the ECB violates the European Union's founding treaty and ”such declarations are not acceptable.”

Asia-Pacific

Reserve Bank of Australia Governor Glenn Stevens said he was not surprised by the Aussie’s strength. The Australian dollar rose to an 18-year high.

Japan’s revised index of leading economic indicators for May rose to 40.9 from the initial reading of 30.0, although still below the key 50 level for the seventh month in a row, the Cabinet Office said.

As a major economic player, China must become “more courageous” in meeting its responsibilities for global stability by increasing the flexibility of its exchange rate and carrying out structural reforms, Bundesbank board member Hermann Remsperger said.

FX Strategy Update

2008
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