What I think is key to the Dollar
US Dollar
It almost feels like a holiday today with the US dollar
fluctuating within a tight 45 pip trading range against the Euro over the past
24 hours. The dollar’s range against the Japanese Yen and British pound was
slightly larger, but even so, most of the action was over before the London
close. With no US economic data scheduled for release today, dollar bulls found
a bit of comfort in the hawkish words from Fed President Pianalto. Repeating
last week’s comments, she was relatively positive on the economic outlook and
suggested that the weak fourth quarter GDP figures on 1/27/06 will most likely
be revised higher.
Speeches from the Federal Reserve are the market’s major focus
this week and in particular, Federal Reserve Chairman Ben Bernanke’s semi-annual
testimony before Congress on Wednesday and Thursday. Although Bernanke has
pledged “continuity with the policies and policy strategies on the Greenspan
Fed,†there could be many new changes under his regime. As a clear speaking book
smart former Princeton Economics Professor, Bernanke has been known to be a
straight shooter. It will be interesting to see how Bernanke balances the
outlook of the economy with market expectations. It is no secret that Printing
Press Ben is known far more as an inflation dove and in an environment where
traders are bumping up their expectations to 5 percent rates, the market has set
the bar high. Therefore what will be most important is Bernanke’s view on the
risks to the housing market. With energy prices sliding, the risks that it poses
to economic growth are also waning. If Bernanke sees greater upside risks for
both growth and inflation, then dollar bulls have their green light for 5
percent rates. Alternatively, if his dovish nature gets the best of him,
Bernanke could be a bit more conservative, talk about how the outlook is
uncertain and risks still exist, which could cause dollar bulls to leave the
market dejected. If so, then we could have a bottom established in the EUR/USD.
Euro
There were two major developments for the Euro today and the
currency barely budged, ending the trading session virtually unchanged. Amidst
growing political conflict with the US, Syria has announced that they were
switching all of their reserves to Euros from dollars. Syria has said that they
have “billions of dollars.†According to the CIA Factbook, Syria’s reserves of
foreign exchange and gold as of 2004 are approximately $5 billion. Compare that
to Japan’s reserves of $610 billion in the same period and we easily realize why
the market shrugged off Syria’s announcement. There have also been rumors today
that Iran could switch to Euro reserves as well to protect their foreign assets.
In 2004, Iran had approximately $30 billion foreign reserves,
which is considerably more than Syria but far less than Japan and China to be
consequential. What the market should be keeping an eye on instead is Iran’s
plan to open a new International Oil Bourse which would trade oil in Petroeuros
instead of Petrodollars. As the world’s third largest holder of oil reserves,
Iran’s move could pave the way for other countries to offer oil denominated in
Euro’s in order to compete with Iran. Looking ahead, there are a lot of reasons
why countries within the Eurozone and Russia would prefer to trade oil in Euros
over dollars. The volatility in the US dollar and the cost of converting
currencies could make Petroeuros particularly attractive. Of course there are
many political barriers that need to be overcome, but oil priced in both dollars
and euros appears likely over time. Although this news should have been positive
for the Euro, it was offset by a more pressing concern that the Bird Flu has hit
the shores of the European Union. Italy, France, Greece and Bulgaria have all
reported outbreaks in swans or other birds. For countries that already have huge
budget issues, Bird Flu not only means damage to the poultry industry, but also
higher costs needed to combat and isolate the outbreak.
British Pound
After one day of respite, the British pound lost ground
against the dollar once again. Although inflation data was slightly positive
with producer input prices rising 1.8 percent (market expected 1.2 percent) and
output prices rising 0.4 percent (market expected 0.2 percent), the
disappointing house price survey and flat leading indicators report with a
downward revision for the prior month stripped the pound of any possible gains.
Data from the UK continues to be mixed, but the market is also treading
carefully ahead of the Bank of England’s Quarterly Inflation report due on
Wednesday.
Japanese Yen
The dollar is slightly weaker against the Japanese Yen thanks to a larger than
expected current account surplus and solid industrial production figures. Strong
investment income helped to boost the current account balance but on the flip
side, the trade balance increased less than expected. The market continues to
focus on speculation about when the Bank of Japan will lift its quantitative
easing policy. BoJ Governor Fukui was on the wires again talking about the
country’s “abnormal†monetary policy framework. However, governmental pressure
continues to keep the central bank’s hands tied and in our opinion, a March and
even April rate hike could still be unlikely.
Kathy Lien
Kathy Lien is the Chief Currency
Strategist at
Forex Capital Markets.
Kathy is responsible for providing research and analysis for
DailyFX,
including technical and fundamental research reports, market commentaries and
trading strategies. A seasoned FX analyst and trader, prior to joining FXCM,
Kathy was an Associate at JPMorgan Chase where she worked in Cross Markets and
Foreign Exchange Trading.
Kathy has vast experience within the interbank
market using both technical and fundamental analysis to trade FX spot and
options. She also has experience trading a number of products outside of FX,
including interest rate derivatives, bonds, equities, and futures. She has a
Bachelors degree in Finance from New York University. Kathy has written for
Stocks and Commodities, CBS Market Watch, ActiveTrader, Futures and SFO
Magazine. She is frequently quoted on Bloomberg and Reuters and has taught
seminars across the country. She has also hosted trader chats on EliteTrader,
eSignal, and FXStreet, sharing her expertise in both technical and fundamental
analysis.
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