eur fundamentals

US Dollar Holding Below Critical Resistance - Reversal Potential?

Monday, 20 October 2008 23:00:23 GMT  |  Terri Belkas, Currency Strategist

The US dollar continues to dominate in the currency markets, this time helped by comments by Federal Reserve Chairman Bernanke as he supported the introduction of another fiscal stimulus package this year.

Such a move would raise speculation that the proactive efforts by the US over the past year will leave the country in a better position compared to regions like the Euro-zone and UK. Indeed, the Federal Reserve started aggressively cutting the fed funds rates in September 2007, while the European Central Bank was increasing rates right up until July 2008 and didn't start reducing rates until the October 8 coordinated cuts. The Bank of England, on the other hand, cut rates by 75bps between December 2007 and April 2008, and participated in the coordinated effort as well. Nevertheless, the Bank Rate is still relatively restrictive for the UK economy at 4.50 percent, leaving the nation likely to tip into recession. It is these relative fundamentals that are allowing the US dollar to rally despite the dim outlook for the US economy.

However, it is ultimately worth wondering how beneficial another stimulus package will be as the government’s past attempts to throw money at their problems hasn’t worked. Indeed, the $168 billion plan only had a limited impact after it was enacted in February 2008, as one of the goals was to boost consumer spending. While US retail sales did manage to gain post-package in May 2008, consumption subsequently cooled during the following months as the combination of falling asset prices (homes, stocks, etc.) and the credit crunch proved to be too restrictive for consumers used to living off home equity loans and credit cards while deteriorating labor market conditions weighed heavily on consumer confidence. There is little chance of these factors improving dramatically anytime soon, and as a result, another stimulus package that hands checks directly to Americans is unlikely to persuade them to spend.

From a technical perspective, the US dollar is holding right below critical resistance versus many of the majors and marks an important point for the currency. Indeed, if the greenback pulls back in the near-term and keeps EUR/USD from falling below 1.3300/15 and GBP/USD from diving under 1.70-1.71, the moves would suggest that a broader decline may be in store in the near-term.

Related Articles: US Dollar Weekly Outlook, US Dollar Gains On Prospects For Second Stimulus Package


Check out Daily Fundamentals in its entirety for analysis and outlooks on the US dollar, euro, British pound, Japanese yen, and the commodity dollars.

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