Dollar Rebound

Dollar Rebounds As Risk Liquidated Across the Board

It didn’t matter that Existing Homes Sales in US plunged another –3.8% or Durable Good came up short of expectations at 1.4% or that New Homes fared even worse than the existing stock of housing. The theme last week for speculators the world over was liquefy, liquefy, liquefy. As equity markets plunged and commodities corrected, capital came flocking back into the greenback. As we explained on Friday, “The greenback rally appears to be driven by technical factors as many speculative trades from equities to commodities to the carry trade are unwound and those assets are parked in dollars for the time being.”

The fears over the sub-prime problem have finally been realized after last week commentary by County Wide Finance chief executive Angelo Mozilo. He noted that he doesn't expect the U.S. housing market to rebound this year or next. With massive resets of Adjustable Rate mortgages still facing the market and a very pronounced tightening of credit conditions over the past several months, the housing recession is likely to persist and weigh on the overall economy. Therefore while the dollar may continue to benefit from the technical unwind its rally may be short lived if the economy falters further. Fed fund rates have already plunged handicapping a rate cut by December to 5% from the current 5.25%. Should US rates be lower, the dollar could resume its decline as capital will resume its search for higher returns.

The question of whether the Fed will cut or not will depends largely on the state of the growth in the economy. That’s why next weeks data is likely to be scrutinized even more closely than usual as traders look for any clues of a significant slowdown. After two consecutive months of negative spreads between consumer income and spending the market is looking for an improvement. However, should the number print negative again it could put further pressure on the buck, indicating further deterioration of consumer balance sheets. Nevertheless, the true test of the strength of the US economy will come later in the week as all eyes will focus on ISM and NFP data. If that news prints in line showing slow but steady expansion it may pacify the markets for the time being-BS