Dollar Rally Slows Down

The Usd dropped slightly in the US session based on price volatility in the commodities sector. The EurUsd rose 34 pips to the low 1.47 level, while the UsdJpy fell 47 pips to 110 as the recent dollar rally is beginning to subside. The GbpUsd was mostly flat, holding ground at 1.86 as the economic picture in the UK remains weak. Equity markets dropped substantially in the US and marginally lower in Europe, with the Dow in particular lower by nearly 200pts. Losses in the equity markets are mostly due to negative news out of the financial sector with shares of Freddie Mac and Fannie Mae, as Fed bailout may become necessary to prevent the possibility of these institutions going into bankruptcy in the near-term. Commodities declined with the exception of gold which is higher than by nearly 13 at 800, while oil continues to toggle back and forth between 112 and 113. Bond markets indicate that investor optimism may be overdone, as yields have retracted across the curve, mostly in the 2yr treasury.

Trade balance in the Eurozone remained negative at -0.1b vs. 1.2B exp. Economists believe that the trade deficit reading is due in part to a decrease in trading with the US. In addition, the Bank of France announced a decline in the consumer sentiment index from 95 to 92. This is a clear indicator that consumers are feeling the pressure from the slowdown in growth in the Eurozone. The German Bundesbank stated that the weaker growth may not balance inflationary pressure, thus creating a difficult position for the ECB. In the UK, Rightmove House Prices fell from the prior reading of -1.8% to -2.3%, which is further evidence that the economic situation is likely to remain dire in that region. Look for the cable to stay rangebound between 1.85-1.87, as the currency price is realizing the severity of the financial state of the UK.

Traders are trying to ascertain risks in the US financial markets, as relative value is becoming increasingly difficult to find. With oil prices trading below $120bbl, the dollar was able to pose a strong rally across most of the G10, however investors should remain cautious of overly aggressive rate expectations. The Usd should remain stable as long as monetary policy projections remain balanced. We should be conscious of where the consensus of Analysts estimates fall closer to the FOMC meeting in September, we are maintain our view that the Fed will not be in a position to raise rates before 2009, thus keeping Usd appreciation constricted to a resistance level of 1.40.

AC Markets
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