eur fundamentals

US Dollar Ends Friday on Strong Note, Could Pull Back Next Week

Friday, 02 January 2009 22:09:13 GMT  |  Terri Belkas, Currency Strategist

US Dollar Ends Friday on Strong Note, Could Pull Back Next Week
The US dollar ended Friday mixed across the majors, as the currency gained against the euro, British pound, Swiss franc, and Japanese yen but fell versus the commodity dollars as oil rose toward $50/bbl. The greenback’s gains came despite the release of disappointing US data, which also had little impact on stocks given the nearly 3 percent surge in the Dow Jones Industrial Average. This price action coincided with sell-offs in bonds and subsequent increases in Treasury yields, suggesting that interest rate expectations are in control, especially as Credit Suisse overnight index swaps are pricing in 50 basis points worth of rate increases by the Federal Reserve over the next 12 months. Focusing on the data on hand, ISM manufacturing fell to a 28-year low of 32.4 in December, signaling a sharp contraction in business activity. Even worse, the new orders and production components fell to the lowest levels since recordkeeping began in 1948, highlighting the severe impact of the US recession and global economic slowdown on manufacturers.

Looking ahead to next week, the US dollar will see a pick up in event risk. On January 6 at 10:00 ET, a gauge of conditions in US non-manufacturing sector - which accounts for approximately 70 percent of total economic activity in the country and includes retail, services, and finance – is anticipated to have worsened in December as the ISM index is estimated to fall to another record low of 37.0 from 37.3. We already know that the US economy fell into recession in December 2007, but this data will help to gauge how long the recession will drag on for. Meanwhile, the 14:00 ET release of the FOMC’s meeting minutes from December 16, when they slashed rates to a record low target range of 0.0 percent - 0.25 percent, should draw some attention, especially if they highlight the Committee’s plans to support the financial markets via measures that “sustain the size of the Federal Reserve's balance sheet at a high level.” Many have accepted this as an indication that the Fed is pursuing quantitative easing, and if it does seem that they will pursue buying “longer-term” Treasury securities, the US dollar could pull back as this would suggest that interest rates in the US will continue to fall. Finally, on January 9 at 8:30 ET, US non-farm payrolls (NFP’s) will hit the wires and are forecasted to fall for the twelfth straight month in December at a rate of -493,000. Something that is garnering even more attention though is the rise in the unemployment rate, which is predicted to match the June 1993 high of 7.0 percent from 6.7 percent. Results in line with expectations would suggest that consumption will continue to wane through the first half of 2009, and could weigh on the greenback.

Related Articles: Top Forex Trades for 2009, US Dollar Could Dive on NFPs - Euro, British Pound May Also Face Bearish Data

Check out the Daily Fundamentals in its entirety for outlooks for the US dollar, euro, British pound, and other major currencies.

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