Quiet Trading in US Dollar Ahead of Christmas Holiday

Published December 24th, 2007 - 11:10 GMT

The US dollar is showing greater signs of weakness as we head into the New Year, as it lost to most of its major counterparts, except for the British Pound and the Japanese Yen. The GBP/USD is on a downward streak as the BOE is expected to more aggressively reduce key rates, while the USD/JPY was trading above 113Yen, and continues to increase its gains as it climbs above the 114Yen trading range. The EUR/USD pair showed no remarkable signs of budding trades despite the bounce back last week, and remains to stay within the 1.43 trading range. The AUD/USD, USD/CAD, and the NZD/USD further indicated the weakening of the US dollar as it continued to lose ground against its major counterparts, and gave a pessimistic outlook for the US dollar for the beginning of 2008. For the remainder of the week, we expect the US dollar to trade within its range as the Christmas holiday will leave the market remarkably quiet, and do not expect to see any drastic price movements for the shaky currency.

The current state of the US economy is stirring up concerns that a recession will take hold of the county in the New Year as sluggish growth gives signs to a deteriorating economy. US legislatures are eagerly awaiting the release of economic indicators in order to get a better sense of the overall welfare of the economy, and the type of fiscal policy that will be most effective in give a helping hand to the slowing economy. However, others have speculated that a recession has already begun as of December, as data released from the US Commerce Department showed income to have increased less than expected, with this year’s holiday shopping sales being the slowest in five years amid reports of a surge in consumer spending. Consumers are also voicing their concerns as the U.Mich Consumer Sentiment index fell to its lowest level since 2005 as energy costs soaring high with house prices tumbling down. Declining growth coupled with rising costs is also causing increased concerns for stagflation to take grip of the US, and will be a huge challenge for the Fed to come up with an effective policy.

Meanwhile the US stock market has extended its gains from Friday as both the DJIA and the S&P500 advanced through the shortened Christmas Eve trading session. The advance in the DJIA was led by Apple and Microsoft, which helped to restore confidence in tech stocks, and the S&P500 was led by retail giant Target, as investors made promising forecasts for the company, along with Office Depot, which saw a surge in sales as shoppers hit the streets for the holiday shopping spree. The stock market is showing promising signs for the week as advancing issues more than doubled the amount of declining issues, with further confirmation of the price movements as the number of advancing volume doubled the amount of declining volume.

US treasuries have shown a constant demand of risk-free short term assets as the US Treasury Department sold $20B in 3-month bills with 3.28%, and sold $19B in 6-month bills with 3.49%. However, even though the Treasury continues to report increased sales of US treasuries, speculators are warning that bond yields will spike as inflation continues to accelerate in the US. The US Consumer Price Index hit above the 10-Year US Treasury note yield, signaling that increasing inflation may cause returns to be quickly eliminated if prices continue to remain high. The rise in inflation is taking a big hit on US economy, leading investors deter their investments from the risk-free assets into higher risk/return assets.

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