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U.S. Dollar Rallies Across the Board, Benefitting From Safe-Haven Flows

U.S. Dollar Rallies Across the Board, Benefitting From Safe-Haven Flows

2010-05-24 11:10:00
David Song, Currency Strategist
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Talking Points
•    Japanese Yen: Benefits From Risk Aversion
•    Pound: BoE’s Barker Sees “Shocks and Challenges”
•    Euro: Skepticism Surrounding EUR 750B Rescue Package Lingers
•    U.S. Dollar: Existing Home Sales on Tap


Meanwhile, former Bank of England Deputy Governor Howard Davies said that he does not expect Britain to lose its top credit rating as the new government turns its attention to the ballooning deficit, and went onto say that the demands for U.K.’s public debt has been “reasonable stable” during an interview with Bloomberg Television.

At the same time, BoE board member Kate Barker warned that the central bank will face “shocks and challenges” going forward and that it will be difficult for the MPC to balance the risks for growth and inflation as the new coalition aims to scale back on public spending, and argued that the “underlying pressures” in the U.K. are “still really quite low” during an interview with the Financial Times. As the government pledges to balance its finances, tightening fiscal policy could lead the central bank to maintain dovish bias for monetary policy over the medium-term as BoE Governor Mervyn King sees increased downside risks for Europe’s second largest economy. As a result, the MPC is widely expected to keep the benchmark interest rate at the record-low and retain the option to expand its asset purchases heading into the second-half of the year, which is likely to drag on interest rate expectations as investors weigh the prospects for future policy.

The Euro halted the three-day advance and slipped to a low of 1.2364 on Monday as investors scaled back their appetite for risk, and the single-currency may face increased selling pressures throughout the day as market participants remain skeptical that the EUR 750B rescue package will target the root cause of the debt crisis. As the governments operating under the fixed-exchange rate system struggle to manage their public finances, market participants speculate the European Central Bank to maintain a loose policy throughout the remainder of this year as the Governing Council aims to encourage a sustainable recovery throughout the region.

The U.S. dollar rallied across the board following a rise in safe-haven flows, and the greenback may continue to appreciate in the North American trade as equity futures foreshadow a 1% drop for the U.S. equity indices. Nevertheless, the economic docket is expected to show existing home sales in the world’s largest economy rise 5.6% in April to an annualized pace of 5.65M from 5.35M in the previous month, and the rebound in home purchases is likely to reinforce an improved outlook for future growth, which could stoke a shift in market sentiment.

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Forex Weekly Trading Forecast - 05.24.10


To discuss this report contact David Song, Currency Analyst: instructor@dailyfx.com

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