Dollar Index at Crucial Resistance

Daily Forex Fundamentals | Written by CMS Forex | Aug 11 08 22:05 GMT |

The greenback continued its ascent Monday on falling crude oil prices and rising US stocks. Supported by weaker growth outside the US, the dollar also got some safe-haven flow from the fighting between Russia and Georgia. Sterling fell to a 21-month low and the euro traded near a 6-month low on declining European economic growth. The Australian and Canadian dollars continued their declines as commodity prices fell again today. The USD/JPY was little changed and the yen rose against most other major currencies.

The EUR/USD fell for a fifth day, testing the 1.49 support. If it is broken, the next major support is the long-term uptrend at 1.45. The pair is oversold, possibly requiring some consolidation. The US equity market, having rallied, is at important resistance; meanwhile, the oil and commodity markets, having fallen dramatically, are at logical support. These factors have pressured the EUR/USD. Unless stocks break resistance, the EUR/USD is likely to find support here as the pair is oversold.



Financial and Economic News and Comments

US & Canada

The dollar index is testing the 76-area resistance, which is the resistance from the long-term downtrend that started early 2006. If this resistance is broken, the greenback could rally to 82. Last week's strong USD rally was supported by weak economic outlooks for the European, Australian, Canadian and Japanese economies as the US economic weakness has spread to the rest of the world. The US economy has not yet recovered, but US growth disadvantage has diminished. US interest rate disadvantage has also narrowed, but the real federal funds rate is too low, which could inhibit further dollar gains.



The Federal Reserve said more banks made it harder for businesses and consumers to borrow money as defaults and delinquencies on home loans increased. "Domestic institutions reported having tightened their lending standards and terms on all major loan categories over the previous three months," the Fed said in its quarterly Senior Loan Officer Survey. About 75% of US banks surveyed indicated they tightened standards on prime mortgage loans, up from 60% in the previous survey, the Fed said.

Canada's new-home prices increased 3.5% y/y in June, the smallest gain since March 2002, due to "a softening housing market in Western Canada," after rising 4.1% y/y in May, Statistics Canada said. New-home prices rose 0.1% m/m in June.

Canada's housing starts fell to 186,500 units in July on an annualized basis, the lowest this year, from a revised 215,900 in June, Canada Mortgage and Housing Corp. reported.

Europe

UK producer prices rose 10.2% y/y in July, the most since 1986, after rising 10.0% y/y in June, the Office for National Statistics reported. July's PPI increased 0.4% m/m. Raw material costs jumped 30.1% y/y in July, compared with 30.8% y/y in June. July's PPI rise adds pressure on the Bank of England to wait before lowering interest rates as the UK economy is heading into a recession.



UK exports rose 4.2% in June, outpacing the 4.1% increase in imports, the statistics office said. Still, the goods-trade gap widened to £7.7 billion ($15 billion), as the deficit with non-European Union countries rose to a record.

Asia-Pacific

China's trade surplus unexpectedly widened 4% y/y to $25.3 billion, the first gain in four months, the customs bureau said. Producer prices rose 10%, the fastest pace in 12 years, the statistics bureau said. The figures add pressure on the Chinese government to let the yuan resume its appreciation.

The Reserve Bank of Australia said it will have more room to lower interest rates due to a "significant moderation" in domestic demand. "Economic growth will be fairly slow in the period ahead," the RBA said in its quarterly policy statement. Australia's GDP will probably expand 2% in 2008, compared with 4.3% in 2007 and less than the 2.25% forecast in May. "On the assumption that the subdued demand conditions are likely to continue, scope to move to a less restrictive monetary policy stance in the period ahead is increasing," the RBA said. RBA Governor Glenn Stevens expects a "significant reduction in inflation over time." The RBA said "demand pressures in the economy now appear to be easing" and it expects a "significant period" of slower growth.

Hans Nilsson
Capital Market Services, L.L.C.
www.cmsfx.com

©C2004-2005 Globicus International, Inc. and Capital Market Services, L.L.C. Any information in this report is based on data obtained from sources considered to be reliable, but no representations or guarantees are made by Capital Market Services, L.L.C. with regard to the accuracy of the data. The opinions and estimates contained herein constitute our best judgment at this date and time, and are subject to change without notice. Capital Market Services, L.L.C. accepts no responsibility or liability whatsoever for any expense, loss or damages arising out of, or in any way connected with, the use of all or any part of this report. No part of this report may be reproduced or distributed in any manner without the permission of Capital Market Services, L.L.C.