US Dollar Strengthens Against Euro, Yen and Pound

It was another day of mixed trading in the US dollar. The greenback rallied against the Euro, British pound, Japanese Yen and Canadian dollar but lost ground against the Australian and New Zealand dollars. The lack of economic data this week has given traders and economists the opportunity to think about how bad the US economy will fare in 2008. Since the disturbingly weak non-farm payrolls number released on Friday, there has no been economic data to confirm or deny that the US economy is headed for a recession. As a result, most traders have braced for the worst as rate cut expectations continued to edge higher. According to Fed fund futures, the probability that the Federal Reserve will lower interest rates by 50bp at the end of the month is now 74 percent compared to 68 percent yesterday and 24 percent a week ago. The current debate in the market is 25 versus 50, but lets take a look at what economists are expecting beyond the January meeting. Assuming the Fed cuts by only 25bp, we could see as much as 150bp of further easing.

Goldman Sachs and BNP Paribas expect interest rates to be at 2.50 percent by the end of the year, while Merrill Lynch is calling for rates to hit 2 percent in early 2009. On the other side of the spectrum, RBS Greenwich and Bear Stearns only believe that another 25bp is needed before the easing cycle comes to an end. At DailyFX,
expect another 75 to 100bp of further easing before the cycle is over and we
believe that it is still premature to call for 50bp of easing without seeing how
consumer spending and consumer prices fared in the month of December. These
numbers are expected next week. Recent comments from Federal Reserve Presidents
confirm our belief that the members of the US central bank have not made up
their minds. This morning, Poole said that even though the economic outlook is
uncertain, it is too soon to tell if housing troubles will push the US economy
into recession. Jobless claims, wholesale inventories and chain store sales are
due for release tomorrow ââ”