Credit crunch weighs Dollar down
The dollar was trading in a tight range against the euro as fresh concerns about the global impact of the credit crunch prevented weak US consumer confidence figures pushing the greenback any lower.
The preliminary University of Michigan consumer confidence indicator for November fell to 75.0 from 80.9 in October, well below expectations for a reading of 80.0.
The figures are likely to boost expectations the Federal Reserve could cut interest rates again in December, with economists expecting US data over the next few weeks to come in on the weak side.
Unfortunately the situation is likely to deteriorate further given the ongoing deterioration in the housing market, the negative effects of falling equity markets and the erosion of purchasing power caused by the surge in energy costs, consequently we suspect the Fed will be forced into a December rate cut with rates likely to move below 4 % in the second quarter of 2008.
However, while gloom over the US economy weighed heavily on the dollar early on Friday, pushing it to a fresh all-time low against the euro of 1.4751 usd, markets were more concerned about the global implications of the credit crunch in the afternoon.
This meant the dollar was little moved by the confidence figures, with the greenback gaining some support as investors sold riskier high-yielding currencies. There was a significant pullback to 2.0855 against the Pound and 1.5651 against the Euro.
Rumours that UK banks have sustained heavy losses as a result of the US sub-prime crisis has caused risk aversion to rise, pushing the pound sharply off the recent highs and sending shares in London and Wall Street lower.
The pound's dropped sharply due to speculation of large losses in the UK banking sector, this in turn boosted the yen as increasingly cautious investors pull out of the risky carry trade, where they sell the Japanese currency to invest in higher yielding ones.
Nervousness in financial markets has also been exacerbated by reports that a collateralised debt obligation (CDO), a specialist security made up of repackaged debt owned by State Street Corp is liquidating its assets. Many CDOs contain assets linked to the troubled US sub-prime sector.
Elsewhere, expectations that the European Central Bank may tighten its monetary policy also weighed on the dollar. EBC President Jean-Claude Trichet last week described the dollar's weakness as "brutal."
The recent comments from policymakers in the major economies suggest that the monetary policy path in the near-term between the US and the other major central banks could diverge further. The ECB may raise its key interest rates by 25 basis points to 4.25 % in December.
The ECB last week kept its rate at 4 %, though the European Union has raised the 13-country euro zone's inflation forecast for 2008 to 2.1 % from 2 % this year. Consumer prices in the euro area rose 2.6 % in October from a year ago on record high oil prices. That was faster than September's 2.1 % gain.
Prices at the London open
GBPUSD – 2.0847
GBPEUR – 1.4235
EURUSD – 1.4643
GBPJPY – 229.99
GBPCHF – 2.3433
GBPAUD – 2.3158
GBPCAD – 1.9715
GBPZAR – 13.4263
The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.
The preliminary University of Michigan consumer confidence indicator for November fell to 75.0 from 80.9 in October, well below expectations for a reading of 80.0.
The figures are likely to boost expectations the Federal Reserve could cut interest rates again in December, with economists expecting US data over the next few weeks to come in on the weak side.
Unfortunately the situation is likely to deteriorate further given the ongoing deterioration in the housing market, the negative effects of falling equity markets and the erosion of purchasing power caused by the surge in energy costs, consequently we suspect the Fed will be forced into a December rate cut with rates likely to move below 4 % in the second quarter of 2008.
However, while gloom over the US economy weighed heavily on the dollar early on Friday, pushing it to a fresh all-time low against the euro of 1.4751 usd, markets were more concerned about the global implications of the credit crunch in the afternoon.
This meant the dollar was little moved by the confidence figures, with the greenback gaining some support as investors sold riskier high-yielding currencies. There was a significant pullback to 2.0855 against the Pound and 1.5651 against the Euro.
Rumours that UK banks have sustained heavy losses as a result of the US sub-prime crisis has caused risk aversion to rise, pushing the pound sharply off the recent highs and sending shares in London and Wall Street lower.
The pound's dropped sharply due to speculation of large losses in the UK banking sector, this in turn boosted the yen as increasingly cautious investors pull out of the risky carry trade, where they sell the Japanese currency to invest in higher yielding ones.
Nervousness in financial markets has also been exacerbated by reports that a collateralised debt obligation (CDO), a specialist security made up of repackaged debt owned by State Street Corp is liquidating its assets. Many CDOs contain assets linked to the troubled US sub-prime sector.
Elsewhere, expectations that the European Central Bank may tighten its monetary policy also weighed on the dollar. EBC President Jean-Claude Trichet last week described the dollar's weakness as "brutal."
The recent comments from policymakers in the major economies suggest that the monetary policy path in the near-term between the US and the other major central banks could diverge further. The ECB may raise its key interest rates by 25 basis points to 4.25 % in December.
The ECB last week kept its rate at 4 %, though the European Union has raised the 13-country euro zone's inflation forecast for 2008 to 2.1 % from 2 % this year. Consumer prices in the euro area rose 2.6 % in October from a year ago on record high oil prices. That was faster than September's 2.1 % gain.
Prices at the London open
GBPUSD – 2.0847
GBPEUR – 1.4235
EURUSD – 1.4643
GBPJPY – 229.99
GBPCHF – 2.3433
GBPAUD – 2.3158
GBPCAD – 1.9715
GBPZAR – 13.4263
The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.
Labels: credit crunch, Weak Dollar, wise money
posted by Drs Search @ 10:18 AM
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