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Dollar Patiently Awaiting Guidance on Direction from Risk Trends, Euro Health, Interest Rate Speculation

Dollar Patiently Awaiting Guidance on Direction from Risk Trends, Euro Health, Interest Rate Speculation

2010-03-24 00:13:00
John Kicklighter, Chief Currency Strategist
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Dollar Patiently Awaiting Guidance on Direction from Risk Trends, Euro Health, Interest Rate Speculation
There is an array of fundamental drivers that can prompt the dollar into action; but none of these sources for volatility and trend are currently making their own progress. Though volatility was restrained and no remarkable breakouts were forged by the benchmark currency amongst its crosses, the Dollar Index nevertheless advanced for the fourth time in the past five sessions and subsequently closed the day at its highest level in a month. However, despite the notable strength the dollar seems to have enjoyed over the past week, this upswing merely represents another spanning of a seven-week range until momentum steps in to support a meaningful extension or reversal of the trend between December and March. In an effort to forecast the timing and direction of the inevitable breakout; it is important to gauge which catalyst is most likely to take responsibility for the drive.

Falling to the wayside since the Federal Open Market Committee renewed its vow to keep the benchmark lending rate at “exceptionally low” levels for an “extended period,” interest rate speculation is still developing in the background. The US three-month Libor spread over its Japanese counterpart continues to grow and has in fact established a new seven-month high today. Yet, until the central bank is on the verge of a hike, expectations will come up short for follow through. In comparison, risk appetite trends have far greater potential for creating volatility; but there is a notable disconnect between the dollar’s stability and Dow’s steady advance. This creates a bias whereby a collapse in investor optimism could play more readily to the currency’s safe haven status; whereas a consistent but reserved advance in speculative interest would produce a comparatively reserved slump for the dollar. Finally, with a distinct time line to work with, there is the health of the euro. As the primary counterpart to the US dollar, the euro is looking at a deadline to resolve a clear financial threat. In the event that the market considers the ultimate solution officials come to an attractive one, the euro could rally along with risk appetite itself. This complicated but media-friendly concern clearly posses the biggest risk to the dollar’s immediate future.

In the meantime, event-risk traders have seen the calendar fill out. Tuesday’s top release was the National Association of Realtors existing home sales report for February. Following unexpectedly sharp declines in turnover, activity in this vital economic sector would finally level off last month. The 0.6 percent decline was moderately smaller than expected, though the 5.02 million annual pace of sales was nonetheless the slowest in eight months and supplies rose to their highest level in nearly two years. This data gives credibility to the recent suggestions from the central bank that the housing market was leveling off at “depressed” levels. Perhaps having greater influence on price than mere indicators, the Fed’s Yellen contributed to speculation with forecasts for growth would likely run below potential for years and core inflation to cool through 2010 and 2011. On the other hand, she took some of the dovish bite off last week’s FOMC statement there is no “time commitment” on their policy.

Related: Discuss the US Dollar in the DailyFX Forum, US Dollar Struggling to Avoid Collapse through Risk, Rate Speculation

Euro: The Tides are Shifting for a Greek Resolution as France Reportedly Joins Germany’s Camp
We move closer to Greece’s deadline for a comprehensive and actionable rescue plan from the European Union with each day. Commentary through the first 48 hours of the active trading week maintains very disparate standings from various policy officials on how the group should aid one of its own members and theoretically secure the market’s confidence in the permanence of the euro and its assets. With calls from EU President Herman Von Rompuy to establish an agreement on this dilemma before the two day summit on Thursday and Friday, there was a notable shift in support for one of the fundamental points of disagreement: whether the solution should be completely EU based or include support from the International Monetary Fund (IMF). No doubt concerned about the growing responsibility for picking up the tab for a direct Greek bailout, France reportedly changed gears to support Germany in its calls for IMF aid to be a critical component of any rescue plans. This is a reasonable plan from the standpoint of policy makers who want to prevent political backlash and further extend themselves in support of a regional recovery. However, this could also be construed as a sign that the region is unable to help itself. And, perhaps adding an aspect of punishment too early, German officials also raised the notion of establishing sanctions on those nations that defy deficit limits. This argument will no doubt carry over to tomorrow; but it will be important not to miss the growth update in the March PMI figures.

British Pound Traders Weather Inflation Data, Look Ahead to 2011 Budget
With a hearty economic docket to work with, the British pound was looking at enough event risk to encourage a significant bout of volatility and perhaps even a short-lived trend given the right combination of results. However, the data would ultimately fall short of its potential. Top event risk was the February CPI data. Maintaining the only reasonable argument for any kind of hawkish bias within the Monetary Policy Committee, the inflation data has remained surprisingly buoyant. Both the annual headline (3.0 percent) and core (2.9 percent) figures cooled more than expected; but both are near the top of the BoE’s target range. Tomorrow, the 2011 budget could redefine expectations for fiscal policy.

Japanese Yen Further Falls Back into its Role as the Top Funding Currency   
Since the US benchmark market rate has overtaken its Japanese counterpart, the yen has settled deeper into its role as the Forex market’s favored funding currency. However, given the restrained pace the FX asset class, we have not fully put this concept to the test. Nonetheless, the fundamental appeal of cheap and abundant Japanese capital continues to grow. Today, the minutes from the BoJ’s February policy meeting in which they expanded its lending program to 20 trillion yen found members warning of downside risks to growth and “widespread” deflation.

Swiss Franc: Can the SNB Hold Curb the Currency’s Steady Climb?   
The Swiss franc’s record high against its euro counterpart prompted a response from the SNB Tuesday. Central Bank Hildebrand suggested the group is ready to act “decisively” on “excessive” gains in the currency. However, many believe they are already working – and failing – to curb the currency’s gains. In trying to lift this exchange rate, the group is fighting dominant fundamental trends; and that is a failing battle.

For Real Time Forex News, visit: http://www.dailyfx.com/real_time_news/

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

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Written by: John Kicklighter, Currency Strategist for DailyFX.com
E-mail: jkicklighter@dailyfx.com

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