eur news

Dollar Back to Pre NFP Levels as Carry Trades, Housing Sector Woes and Protectionism Return

Tuesday, 10 April 2007 21:22:41 GMT  |  Kathy Lien, Chief Strategist

By the time European traders returned to their desks Tuesday morning after the long weekend holiday, the US dollar already gave back all of its non-farm payrolls related gains to trade at approximately 1.3415 against the Euro.  The sharp moves overnight and the dollar bearish news flow that drove it were enough to convince European traders to follow the trend instead of fading it.  Carry trade buying was particularly aggressive last night as some traders laid on positions ahead of the Bank of Japan’s rate decision while others focused on snapping up the high yielding Australian and New Zealand dollars in response to Mexico based Cemex’s $14 billion bid for Australian cement maker, Rinker.  In addition to the acquisition flow and carry trade demand, the dollar was also sold on news that the US filed two new trade cases against China in the WTO over copyright piracy and restrictions on the sale of American books, music, videos and movies.  US protectionism has never been taken positively by currency traders who know that the latest initiatives by the US government would only raise the stakes for a trade war. Finally, concerns about the housing market also resurfaced overnight after American Home Mortgage announced that its earnings would be heavily impacted by the losses in Alt-A mortgages, which are a grade higher than sub-prime.  This is a clear indication that the problems in the sub-prime sector are spilling over to other parts of the housing market.  If Alt-A lenders go, then prime lenders could be next.  Looking ahead, tomorrow’s release of the FOMC minutes from the March 20-21 meeting could lend some support to the US dollar.  Even though the central bank left interest rates unchanged last month, they decided against dropping their tightening bias.  The tone of the statement contained the same degree of hawkishness that we have heard from central bank officials in recent weeks so we expect the minutes to reflect that.  If this is the case, it could help fuel a rebound in the US dollar. 

Resources

• free demo account
• forex courses
• open an account
• forex stream
• free webinars