Reply #20: dollar watch

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Dollar - Will The Fed Sacrifice The Greenback?

http://www.dailyfx.com/story/topheadline/Dollar___Will_The_Fed_1190007768065.html

Hardly an auspicious week for dollar bulls as the greenback set yet another record low against the euro hitting 1.3926 on Friday. But follow through was relatively limited. “The markets remain in a state of flux, “ we wrote on Thursday. “At this point the currency market is operating under the assumption that the Fed will cut 26bp at next week’s FOMC meeting while the ECB may raise rates another 25bp in October, which explains EURUSD recent strength. However, those assumptions are far from ironclad and depend to a great extent on the degree that the collapse of housing has affected overall US consumer demand.”

Last Friday’s Retail Sales were hardly a boost for dollar bulls as the number missed expectations printing at 0.3% vs. 0.5%. Still it was not disastrous with the slowdown in retail offset somewhat by robust vehicle sales. The dollar actually came off the lows in the aftermath of the news as the worst fears of a 50bp cut from the Fed began to fade away. Indeed we believe that Fed will cut rates but only reluctantly and only by 25b. Furthermore, given $700/oz. Gold and $80/bbl oil, inflationary concerns will weigh heavy on the minds of monetary policy makers. Therefore its quite likely that that Fed, while lowers the Fed rate on Tuesday, may emphasize that this is a one time event rather than the start of new loosening cycle. The FOMC members are highly cognizant of the precarious state of the dollar and it is doubtful they would want to exacerbate its weakness by sending an overly dovish message to the markets.

After the FOMC rate announcement, the inflation story will be second most watched report by currency traders this week. With both PPI and CPI data on tap, market players will be quick to respond to any uptick in price data. The Fed finds itself between a rock and a hard place as it must balance the calls for an ease in the credit markets with its need to maintain confidence in the US currency. -BS

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US Dollar Remains Near Record Lows As Retail Sales Increase Chances Of Fed Cut On Tuesday

http://www.dailyfx.com/story/bio1/US_Dollar_Remains_Near_Record_1189804659644.html

The US Dollar ended Friday very little changed from Thursday, with the currency rallying in the morning as traders shrugged off the less-than-impressive retail sales figures, only to give up those gains in the afternoon. On the surface, the headline advance retail sales report didn’t look so bad: sales rose 0.3 percent in August while the July reading was revised up to 0.5 percent. As usual, however, the devil is in the details. Excluding motor vehicles and parts, sales actually fell 0.4 percent, as clothing purchases eased back despite massive discounting for back-to-school shoppers while sales of building materials dropped off as the housing recession worsens. Meanwhile, service station receipts took the biggest blow of all, with sales down 2.4 percent as gasoline prices fell. Overall, while the report looks relatively healthy upon first glance, the data actually highlights emerging softness in consumption growth that will likely take a toll on Q3 GDP, and this is one of the main factors that will drive the Federal Reserve to cut rates next Tuesday. After all, fixed income, forex, and equity markets are expecting at least a 25 basis point cut – if not 50 basis points – and this speculation likely supported the University of Michigan consumer confidence index, which rose to 83.8 in September from 83.5 the month prior, as consumers were slightly more optimistic regarding the economic outlook. At the time of writing, out of 128 economists polled by Bloomberg, 98 said that they thought the Fed would cut rates by 25 basis points, while 24 said they would go for a sharper 50 basis point cut, leaving only 6 economists anticipating that the central bank will leave rates unchanged. A look at our own poll in the DailyFX Forums shows that traders are more evenly divided, with 46.34 percent indicating that they believe the Fed will cut, while 39.57 percent said that the central bank will take more time to make a decision. The pressure is clearly on Fed Chairman Bernanke, as this is one of the most highly anticipated rate decisions in recent memory. As a result, range trades will likely prevail for the US Dollar on Monday, but Tuesday should see a surge in volatility market-wide, especially if the Fed does the unexpected holds their ground in fear of moral hazard and leaves rates steady at 5.25 percent.

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