The US$ continues to gain across the board as a growing view is forming amongst traders that financial markets might have weathered the recent storm. Actions by the Federal Reserve last week and earlier this week seem to be buttressing investor confidence. The bailout and acquisition of Bear Sterns, coupled with the Fed injecting liquidity into the overnight cash markets started this cycle of calm. It was further supported as the Fed cut interest rates by only 75 basis points on Tuesday, less than the 100 basis points forecast, signifying that the Fed was not in a “panic mode.” Further helping this air of calm and stability returning was the announcement by the Federal Housing Authority yesterday that they were easing the capital requirement for both Fannie Mae and Freddie Mac. This action of reducing the reserve requirement could have the desired effect of injecting an additional $60 billion into an already tight mortgage lending market. This sentiment seems to be reflected in the recent steep drops in both the price of gold and oil. Gold has dropped some $100 over the past several days while oil prices have now broken back below the $100 per barrel. Earlier this morning the US released higher than expected weekly jobless claims reinforcing the view that US jobs market remains under duress. The market will next turn its attention to the Philly Fed Index expected to register –19.0 and Leading Indicators expected to decline 0.4%, both slated for release at 10:00 a.m. Traders will likely continue to watch the direction of debt and equity markets, as well as the trading cycle of oil and gold, to see if stability has indeed returned to markets. Overall, the US$ could likely continue to post further gains today as traders unwind short US$ positions ahead of the long Easter holiday.
The euro fell overnight, as traders seem to be gaining some confidence in the overall health of the US financial sector and after the release of some surprisingly weak data in the Eurozone. With traders unwinding positions in commodities and cautiously vacating long euro positions, the US$ continues to gain. Also supporting this euro drop overnight was the release of a report showing a significant drop in Euroozne service output. This decline in output has refocused the market on the prospect that the Eurozone economies will slow later this year as the US economic slowdown transfers across the Atlantic. This could ultimately lead the ECB to begin slashing rates, making the euro less appealing. However, expect trade to be guided over the next several weeks, as analysts remain squarely focused on the overall health of US financial markets.
The yen fell modestly overnight as the seeming calm descending upon financial markets is leading traders to cautiously reenter riskier positions financed with short yen positions. Expect the yen to continue to maintain its position as a proxy for market risk, as traders cautiously reenter the “carry trade.” It is likely that the direction of the yen will be determined over the next several months by the levels of confidence traders exhibit towards financial markets and the overall health of the US economy.
The pound fell modestly overnight as US$ strength steers trade, despite the release of a report showing that UK retail sales rose more than forecast in February. This robust data reinforces the view that inflation pressures are accelerating in the UK economy, likely leading the Bank of England to keep rates firm if not push them higher in the next few months. This environment of high rates will keep the pound firm for some time.
