The Euro fell below 1.2400 against the dollar for the first time since April, 2004 sinking to as low as 1.2333 before finding support. Talk of more bank failures, the troubles of Hungary and the Ukraine and speculation of another coordinated rate cut has stoked fears of a prolonged global downturn which has sent traders fleeing from risky assets into the safe havens of government bonds, especially U.S. treasuries.
Talking Points • Japanese Yen: Rises To Highest Level Since 1995 • Pound: Pound Weakness As Brown Hints at Further cuts • Euro: German IFO Falls To Five Year Low • US Dollar: Risk Aversion To Drive Dollar Sentiment Euro, Pound Continue Losses as Global Outlook Dims, Yen Increases Despite Talk of Intervention The Euro fell below 1.2400 against the dollar for the first time since April, 2004 sinking to as low as 1.2333 before finding support. Talk of more bank failures, the troubles of Hungary and the Ukraine and speculation of another coordinated rate cut has stoked fears of a prolonged global downturn which has sent traders fleeing from risky assets into the safe havens of government bonds, especially U.S. treasuries. The drop in confidence was evident in the German IFO reading which fell to 90.2 from 92.9, which was the lowest level in more than five years. German banks have remained stubborn and have been reluctant to take government aid as they look to preserve their autonomy. Fears have grown that the troubles in the emerging markets of Eastern Europe will add another anchor to the already declining Euro-Zone economy. This has led to German finance minister Steinbrueck urging banks to accept the aide before they experience further losses. It is this obtuse mentality which has led Europe to a recession as they have continued to underestimate the level of the impact of the credit crisis. Economists are calling on the ECB to take advantage of the room they posses to lower interest rates, as the benchmark stands at 4.25%. Overnight index swaps are now pricing in 117 bps of cut from the central bank over the next twelve months. The Euro may continue to see losses as the confidence in European leaders to act swiftly enough to avoid further damage is dwindling. The Pound would dip below the 1.5300 price level as U.K. Prime minister Gordon Brown hinted at further easing with these comments "Now inflation is actually coming down over the next few months and that will mean that it gives scope to all the monetary authorities, including the Bank of England, round the world to make a decision about interest rates," The U.K. economy is clearly now in a recession with the 0.5% contraction in the third quartet and expectations that the next two will be weaker. The housing market continues to sink with Hometrack reporting that home prices fell the most since 2001. We may see the Pound look to test Friday’s low of 1.5257 with a break here leading to further declines as markets are now pricing in another 198 bps worth of rate cuts according to Credit Suisse Overn9ight index swaps. A failure to break below this level could signal that a short-term bottom may in place and we could see an extended retracement. The Yen continued to gain on increased risk aversion which sent stocks plunging overnight in Asian and Europe with the Heng Seng experiencing a 12% loss. The Yen continues to set fresh 13 year highs against the dollar and was back below 114 versus the Euro, despite talk of intervention by th BoJ. G-7 leaders issued a statement thatthere were concerns regarding the volatility surrounding the Yen, but the lack of a clear signal that intervention was imminenet led to the USDJPY gapping open. The possible of a intervention could weigh on the Yen as and lead to USDJPY support. The dollar continues to be the beneficiary of the worldwide flight to safety as global recession concerns mount. Despite expectations of a rate cut of at least 50 bps the dollar continues to gain as speculation has increased that world leaders will use the upcoming FOMC policy meeting as an opportunity to launch another coordinated rate cut. Although lowering interest rates may not have its typical impact, the markets are calling for further easing and Fed Chairman Bernanke has yet to disappoint. The Fed Funds Futures are pricing in a 74% chance of a 50 bps reduction and 26% for a 75 bps. As equity markets continue to decline the attractiveness of U.S. treasuries increases, which is fueling demand for dollars. The U.S. economy despite all of its horrendous fundamentals is still viewed as the best positioned to emerge from the crisis first, which continue to be a supportive factor for the dollar. Will The EUR/USD Fall to 1.2000? Join us in EURUSD Forum Related Articles: German Finance Minister Steinbrueck Urges Banks to Use Rescue Package Forex Trading Weekly Forecast - 10.27.08 To discuss this report contact John Rivera, Currency Analyst: jrivera@fxcm.com