The US$ remained volatile overnight as trade remains thin ahead of the New Year holiday. The dollar saw support late yesterday afternoon, and into the early evening as the Fed in cooperation with the Treasury Dept. extended GMAC, the financial arm of GM and the largest lender to GM dealerships across the U.S., a $5 billion loan from TARP funds after being approved as a bank holding corporation earlier this week. This bolstered the dollar as the risk element of the faltering automakers is at least on the back burner for the time being. However, reversing the dollar’s gains are continued fears over Israel’s declaration of “all-out war” against the Hamas-controlled Gaza Strip. With an added element of geopolitical tension to the already risk-averse atmosphere, traders have sought safe investments, thus pushing the dollar lower against European and commodity-based currencies (the Swiss franc, Aussie dollar, South African rand, etc.). This morning sees key economic data including the S&P CaseShiller Home Price, expected to show deeper declines, Chicago PMI, expected to register 33.0, and Consumer Confidence, expected to show a modest improvement as gasoline prices have plummeted over the past month. In the short term, expect the dollar to remain range-bound as traders are unwilling to take large positions into the new year, however economic data could influence trade as focus again shifts back to the comparative strength of the U.S. economy versus that of its G7 counterparts.
The EUR pared its losses from yesterday’s trading session over renewed fears that the Israeli conflict may impede oil supply. With heightened geopolitical tensions dominating trade, the euro has seen a boost against the dollar. The common currency also edged closer to parity with the GBP, as the euro continues to benefit from its current yield advantage over the pound and with heightened expectations that the BOE will continue lowering interest rates in the near term. However, the euro’s upside potential may be capped as expectations grow that even if the ECB holds rates steady at their January meeting, they will still be forced to lower interest rates in the medium term. This morning German CPI, the most common gauge of inflation, registered far lower than expected, and lower than the ECB’s target rate of 2%. With the Euro Zone’s largest economy registering low inflation, the potential for lower ECB interest rates has grown. In the short term, expect the common currency to remain well supported as the Israeli conflict unfolds and traders gauge the overall health of the Euro Zone economy headed into 2009.
The JPY remains flat this morning ahead of the new year. The yen’s role as a “safe haven” asset remains largely in tact, however expectations of dismal GDP data from the 4th quarter has capped the yen’s appreciation as traders’ attention again focuses on comparative economic strength amongst the G7. The Japanese economy is expected to shrink by as much as 12.2% in the fourth quarter, the sharpest drop since 1974, as exports have collapsed. Exports slid an unprecedented 26.7% last month as the yen appreciated rapidly and global demand waned. Thus, in the short term, expect the yen to remain relegated to tight ranges before the new year.
The GBP pared some of its losses from yesterday after hitting a fresh six-year low against the dollar, and an all-time low against the EUR. While expectations that the BOE will lower interest rates in the near term keep the pound under pressure, there have been an increasing number of bets that ultra-low interest rates and quantitative measures will be stimulative to the British economy. In the long run this will prove supportive for the pound, and could lead to a modest recovery. However, in the near term, the continued collapse of U.K. home value, falling 12.2% so far this year from a year ago, will keep sterling under pressure. In the short term, expect the pound to remain towards the lower end of its ranges ahead of the new year.
