eur fundamentals

US Dollar Down Amidst Fed Rate Cut, What Impact Will US GDP Have on Thursday?

Wednesday, 29 October 2008 23:24:08 GMT  |  Terri Belkas, Currency Strategist

The US dollar plunged across the majors on Wednesday, but the decline came primarily during the European trading session and start of the New York trading session in anticipation of the Federal Reserve’s rate decision.

The Fed pulled no surprises as they cut rates by 50bps to a more than 5-year low of 1.00 percent amidst a marked slowing in economic activity and weak consumer spending. Likewise, slowdowns in many foreign economies has created dim prospects for US exports, suggesting that upcoming GDP figures on Thursday should signal a recession. The Fed touted an array of different policy actions implemented recently, including the October 8 coordinated rate cuts and efforts to boost liquidity, saying that they should help to "improve credit conditions and promote a return to moderate economic growth." However, the central bank also noted that "downside risks to growth remain," and combined with outlooks for more moderate inflation, the Fed seems likely to cut rates even further before year-end. In fact, fed fund futures are fully pricing in a 25bp cut at their next meeting on December 16. Looking ahead to the next 24 hours, where the US dollar goes will depend heavily on risk appetite. Our latest forex correlations report shows that there is a solid inverse correlation between the greenback and the Dow Jones Industrial Average as bouts of risk aversion tend to send the currency spiraling higher on safe-haven flows while the US stock markets plunge. Upcoming US data could have a huge impact on the financial markets as Q3 GDP is anticipated to fall to a 7-year low of -0.5 percent after surging 2.8 percent in Q2 on robust export growth. However, with global growth slowing, foreign demand for US goods is simply not there. Add to that the sharp pullback in consumption and the outlook for the US is not good. Looking at the Bloomberg News poll of 75 economists, consensus forecasts range from -1.9 percent to 1.2 percent, but with the majority calling for a negative result, there are potential downside risks for the figure. Given the US dollar’s inverse correlation with US stock markets, the greenback could actually gain following this release though, as the indications of recession may trigger selloffs in the DJIA and S&P 500. However, if equity traders brush off the data, fundamentals could finally start to have more of an impact on the forex markets and the US dollar could tumble. Unfortunately for those looking for a sustained drop in the greenback, the former scenario may be more likely to occur.

Related Articles: How Will A Rate Cut And Recession Affect The Dollar's Reserve Status?, The Fed Cuts 50bps But Can Rates And Recession Turn The Dollar?


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