The US Dollar got hit after Wednesday night's announcement on interest rates by the US Federal Reserve. Whilst traders expected rates to remain unchanged at 2% it was the rhetoric suggesting that any hikes were a way off yet that gave cause for them to dump the dollar in no uncertain terms.
The Greenback continued to weaken yesterday as the Dow Jones came in for a bit of a slap, and oil jumped by over 4$ a barrel to a record $140 (now $142 ), as OPEC forecast prices going even higher to $170.
OPEC President Khelil stated that he believed the weaker dollar was the main cause of the price increase in oil, as the dollar-based commodity becomes cheaper as the currency slides therefore boosting demand, not to mention increased use in China and India.
EUR/USD has climbed back up to resistance levels at 1.5780 before falling back while GBP/USD has very nearly broke back up through 1.9900, gaining over 1 1/2 cents, With the Dollar losing ground across the board the net result on EUR/GBP was that we have seen a sidelined performance in a range of 0.7913-48 ( 1.2581-1.2637). Similarly the Pound has failed to gain elsewhere as other currencies such as the Swiss Franc have been preferred choices.
This afternoon sees the US core inflation rate and spending data at 13.30 BST. Following the release of $70 bio in tax rebates since May, we should see some of that shown in high street spending, giving hope that the US economy has been handed a bit of a boost. If not, then this wave of Dollar selling will gather pace again, albeit within the prescribed ranges.
I still stick with the view that the Dollar will turn around before year-end and when it does it will be a rapid and bloody ascent. There continues to be an argument that the Euro is too high, with many constitutent countries feeling the impact, and that the after-shock of the Irish NO vote on the Lisbon Treaty is yet to be fully felt. My thoughts on the UK are already well documented.......... !
The current trend for traders to look myopically at interest rates with, it would appear little or no emphasis on the broader fundamentals, seems crazy to me still but we will now look forward to next Thursday's decisions from the BOE and ECB with added gusto.
However, I have always said that the FX markets are fickle, ( trading volumes of over $2.7 trillion each day with over 98% being pure speculation should leave people in no doubt on this ) and we can expect more volatility as we head into the summer season before any new trend is set.
Mike
Mike Paterson is a former senior interbank trader with UBS and Credit Suisse and has been involved in the FX market for over 28 years. He now runs his own consultancy advising private and corporate clients on best execution of currency requirements. Mike also presents at a wide range of events and runs currency workshops for businesses to better understand the vagaries of the FX marketplace.
For further information please contact him at :
MSP Foreign Exchange Services
Office: + 44 ( 0 ) 1732 700383
Mob: + 44 ( 0 ) 7887 581696
Email: mspfx@tiscali.co.uk
