What is Behind Today’s Dollar Recovery?

Here’s a snippet from my Daily Currency Focus on GFTforex.com

After seeing the US dollar sell off for 5 straight days against the Euro and Japanese Yen, we were not entirely surprised to see today’s recovery, especially on the heels of better than expected economic data. The market has become accustomed to disappointments so good news was a welcome change. The European Central Bank has also reduced the interest rate that it offers to banks that deposit with them in order to encourage lending. The 15 percent rally in the Euro has led many to people to believe that the ECB may reconsider their plan to hold interest rates steady in January and the deposit rate cut was seen as a step in that direction. Thin market conditions near the holidays have exacerbated the volatility in the currency market. However even though the greenback is higher today, we had both positive and negative news impacting the dollar.

The Good News: Better Data, Oil at $36, More Stimulus on the Way

The Philly Fed index and jobless claims were better than expected, but the improvements still masked underlying weakness. New orders singlehandedly drove the Philly Fed index higher as sharp deteriorations were seen in the other 8 subcomponents. Even though the number of people claiming unemployment benefits still rose by more than 500k last week, the rise was less than the previous period, which suggests that the hemorrhaging in the labor market is slowing. However that has not stopped weekly claims from hitting a new high. There was also news that Obama’s economic team is looking to push through a stimulus package worth up $775B over the next two years. This package should play a big role in helping to turn the US economy around. Oil prices have also fallen to a 4 year low of $36 a barrel, which represents a 75 percent decline from its record high. In may not be long before we see gasoline prices at $1.50 a gallon. Lower oil prices acts as a tax cut for consumers and should help to improve consumer spending.

The Bad News: GE AAA Rating at Risk, Pessimistic Comments from Fed Official


Aside from the fact that the good news masked underlying weakness, more worrisome reports have hit the corporate sector. Leading indicators fell to the lowest level in 4 years on the back of a sharp rise in jobless claims and decline in US equities. Standard & Poor’s revised General Electric’s rating outlook from stable to negative, which suggests that GE’s AAA credit rating may be at risk. A company’s credit rating is directly tied to their cost of borrowing and their overall health. GE’s problems center on their financial unit which was hit hard by the credit crisis. All Big 3 automakers have also announced that they will idle a number of their plants over the next month, reflecting the severity of their financial situation.

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Despite the recent rate cut, Fed officials remain very pessimistic about the outlook for the US economy. Fed President Fisher expects the US economy to continue to contract in 2009, driving the unemployment rate past 8%. Having leaned towards hawkishness in the past, Fisher’s dovish comments are particularly alarming. However Greenspan expects the economy to rebound in 6 to 12 months, but of course he is no longer involved in US monetary policy.

* USD: WHAT IS BEHIND THE DOLLAR RALLY?
* EUR/USD: SURPRISED BY THE ECB
* GBP/USD: SHARP REVERSAL DESPITE STRONGER SPENDING
* USD/CAD: LARGEST DECLINE IN RETAIL SALES SINCE SEPT 2006
* AUD: WEAKER ECONOMIC DATA, LOWER GOLD PRICES
* NZD: OIL PRICES AT $36 / BARREL
* USD/JPY: MARKET DIVIDED ON RATE CUT OR INTERVENTION

2 Comments

  1. Hi Kathy,

    I would like to know how much of a bp rate cut is the market pricing in from the ECB in january, in the EURUSD.

    You sometimes say ‘the market is pricing a w% of a x rate cut and a y% of a z rate cut’, and so on. Where can we find that information?

    Thanks again and have a great weekend!

    Reply
  2. We look at euribor futures for the EUR/USD. The market is pricing in a 50bp rate cut by January

    As for the probability of a Fed rate cut, it is based upon a calculation using fed fund futures. If you have access to a Bloomberg terminal, they also publish the data there.

    Reply

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