It was a volatile yet directionless period for the US dollar last week. With only a smattering of second tier economic indicators populating the docket, fundamental traders deferred to dramatic swings in commodity prices, mounting fears of a major bank collapse and ever-exigent and evolving interest rate expectations.
Dollar Outlook Balanced Between Growth And Financial Markets
Fundamental Outlook for US Dollar: Bearish
- Data shows no end in sight for the housing recession and inflation spiral
- Growing financial market fears and cooling commodity prices temper forecasts for Fed rate hikes
- Bernanke’s speech on financial stability focuses fears rather than calms nerves
It was a volatile yet directionless period for the US dollar last week. With only a smattering of second tier economic indicators populating the docket, fundamental traders deferred to dramatic swings in commodity prices, mounting fears of a major bank collapse and ever-exigent and evolving interest rate expectations. However, these market themes were hardly fallback drivers as we have seen the US dollar push right back towards major resistance with traders on both the technical and fundamental side of the fence waiting for each of these pieces to fall into place before confidence in the greenbacks’ dominate trend is revived. No doubt, these market dynamics will play just as prolific a role in the week ahead as they have in the one that has just passed.
With the US dollar rising to new multi-month highs against all of its liquid counterparts, skeptical bears will start to point out the fading interest rate outlook for the Fed as a good reason to reevaluate any long-term dollar rallies. While many G10 central banks are looking at significant rate cuts over the coming year, most of their benchmarks would still be well above the Fed Funds rate even if all the forecasts prove accurate. On the other hand, futures show there is a 68 percent chance that the Board of Governors will keep rates at 2.00 percent through the end of the year. What’s more, considering the evolution of market conditions lately, even these officials forecasts could be construed as being overly optimistic. Commodity prices have tumbled through August (having yet to show through in the lagging inflation reports), consumer spending is threatening to revive fears of a recession and it seem only a matter of time before another major US bank collapses. Of these three, the health of the financial sector is the most immediate concern with Lehman Brothers and Freddie Mac/Fannie Mae both showing fading vital signs.
With these key market dynamics just off in the background, traders will also have to prepare for a number of scheduled economic releases. Housing and consumer-centric data are two general themes, but the key reports will be the minutes from the FOMC’s August rate decision and the revision to the 2Q GDP report. The latter will be particularly interesting as the market consensus is calling for a sizable, positive revision from a 1.9 percent annualized clip to 2.7 percent. If such a figure is met, it would certainly offer the dollar a boost in the short term; but with housing, consumer spending and business conditions all faltering in the months since the first half ended, a consequential advance would merely be setting the currency up for a more magnificent collapse as recession worries regain traction. – JK
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