The US$ continues to remain under pressure as the greenback continues to lose its luster to foreign investors. Comments last week from US Treasury Secretary Paulson and US President George Bush altering the official US$ language, suggesting that they now “very much support” a strong US$, appear to have had little affect on the direction of markets, as the greenback remains weak. Overnight talk reemerged in markets that many Gulf nations could alter the long-standing pegs to the US$ that their currencies have maintained. Members of the Gulf Cooperation Council, which includes Saudi Arabia, the UAE, and Qatar, have stated that they will address the subject of changing the peg at a meeting to be held next month. Over the past several years, these nations have been aggressive US$ sellers and euro buyers as they diversify their reserve mix. Also weighing on the US$, is a proposal put forth by OPEC nations Venezuela and Iran, that the price of all oil contracts be shifted to euros or other currencies, rather than the US$. While this idea was rejected flat out by the Saudis, the prospect that such an idea could come to a vote could have a dramatic negative psychological impact on the greenback. The US$ did receive some relief however, when Chinese officials suggested that they “support a strong dollar” and could refrain from further reserve diversification in the short-term. However, the main factor driving the US$ is the divergence in interest rates between the US and other G8 nations. With the US housing market continuing to slump, the market has priced in a 90.0% probability that the Fed will lower interest rates an additional 25 basis points when they meet on December 11th. The market will remain focused on the flow of US economic data this week, albeit limited by the Thanksgiving holiday. Tomorrow sees the release of housing starts and building permits, both of which should help affirm the dismal position of the US housing market. In addition, the Fed releases its minutes from the October 31st meeting, which should verify the Fed’s expected rate cut next month. Later this week, we see Michigan Confidence and Leading indicators both slated for release on Wednesday.
The euro continues to consolidate in recent ranges, as the market appears to be moving towards locking in profits as the year winds to a close. As interest rates remain the focus of the market comments from both the Fed and the ECB will closely monitored over the coming weeks. While the Fed is widely expected to cut rates next month, some uncertainty still surrounds the policy position the ECB will adopt. As ECB Chief Trichet reiterates his Bank’s position about their desire to remain vigilant towards inflation pressures, the continued fallout from sub prime lending woes could keep the Bank sidelined until next year. As this reemergence of uncertainty surrounding the direction of Eurozone rates arises, the market failed to sell the common currency as the reserve diversification comments from the Middle East and OPEC rattled the market. Look for ranges to be fairly tight this week as limited data and the Thanksgiving holidays steer trade.
The yen surged overnight as traders continue to unwind carry positions funded with the Japanese currency. As uncertainty continues to rattle global markets as highlighted by the drop in equity prices overnight, the yen firmed. As the US economy shrinks and concerns mount that growth in China is beginning to ease, traders continue to unwind equity positions funded with a “cheap” yen. As traders continue to remove risk from their portfolios, the yen will continue to gain. Expect this trend to continue for some time as traders square portfolios and remove risk ahead of year-end.
The pound fell to a one-month low against the US$ overnight following the release of weak housing data in the UK. UK housing prices fell in October, echoing comments from Bank of England Chief Mervyn King last week, stating that the UK housing market looks “particularly weak.” With this data as a backdrop, the market is lending further credence to the Bank of England economic outlook report released last week that suggested another rate cut would have a limited inflationary effect on the UK economy. As the market seems to be now positioning for a rate cut from the BOE, it is only the timing of such an action that will ultimately steer the direction of the pound.
