Euro and Pound Reverse All Their Early Gains as Dollar Dominance Resumes

Daily Forex Fundamentals | Written by Global Forex Trading | Sep 08 08 12:07 GMT |

Overnight Wire US Treasury puts Fannie and Freddie into conservatorship, Asian and European equities surge Oil higher on worries over Ike which looks to hit Gulf of Mexico Gold above $810 on inflationary implications of GSE rescue Nomura mulling investment in Lehman IG Metall union in Germany seeking 7.5% wage hikesaccording to Der Spiegel Central Bankers meeting in Basel - all supportive of Treasury rescue Australia Aug jobs ads -4.9% m/m, newspaper ads -4.0%, internet -5.0%. NZ Q2 value of residential building -7.3% q/q, biggest fall in two years Japanese Eco Watchersat 23.3 vs. 29.7 forecast, worst in 5 years EZ Sentix at -20.2 vs. 15.3 previous UK PPI -2.0% vs. -1.2% eyed CAD Building Permits on tap USD Consumer credit at 17:00 GMT USD/JPY balloons to 109 on resumption of risk assumption as equities rocker higher AUD/USD reverses all the gains as dollar flows return and data proves negative GBP/USD reverses early Asia spike as PPI turns very soft prompting speculation of rate cuts in October EUR/USDloses all its gains as stops run to below 1.4200 handle Euro and Pound Reverse All TheirEarly Gains as Dollar Dominance Resumes Neither the rise in oil prices nor the increase in equities could help the euro maintain its early Asia open rally, as the unit gave back all of its gains and then some by the start of North America trade. In the wake of the de-facto nationalization of Fannie Mad and Freddie Mac by the US Treasury, global equities rallied with Nikkei jumping up more than 2.5% as fears of a systemic collapse of US financial system diminished considerably. The euro and cable both rose more than 200 points as a result of better environment for risk appetite as carry trades which have been pummeled for the past two weeks proceededto stage a fast and furious rally during Tokyo trade. However, the party did not last long.Oil faded from its highs despite the looming threat from Hurricane Ike, economic data from both the EZ and UK disappointed once again and upon further reflection currency traders decided that Treasury’s actions over the week-end not only avoided a crisis but produced a vote of confidence in US assets that could continue attract more flows into the dollar for days to come. The economic news provided no help for dollar bears with EZ Sentix survey sinking to -20.2 from -15.3 the month prior and UK PPI showing a much larger than expected contraction of -2.0% vs. -1.2% projected. With UK headline inflation shrinking dramatically the pressure on BoE to lower rates by October will increase exponentially and pound is therefore likely to be mired in the 1.7500-1.8000 zone as a result. Although the Treasury announcement has generated a surge of optimism we continue to view the move as a sign of long term weakness rather than strength for the US capital markets.While the US Treasury has managed to provide a backstop to the potential losses at the GSEs at a yet to determined amount of taxpayer capital, the current plan fails to deal with underlying problems of asset deflation and escalating non-performance of mortgage loans. Therefore, while the week-end announcement may have assuaged US lenders temporarily protecting the country’s balance sheet from further systemic risk, it will do little to stimulate economic growth going forward. We believe, that the dismal unemployment numbers which suggest that demand in Q4 of 2008 will be curbed sharply were the far more important piece of economic news last week. Thus, after the initial euphoria towards the buck dies out, the low yielders like the yen and the francshould resume their upward trek as investors take a more sober look at US economic conditions and risk aversion returns to the market. FX Upcoming Currency GMT EST Release Expected Prior CAD 13:00 9:00 CAD Building Permits (MoM) (JUL) -0.5% -5.3% USD 14:00 10:00 USD Consumer Credit (JUL) $9.0B $14.3B Boris Schlossberg http://www.gftforex.com DISCLAIMER: This forum and the information provided here should not be relied on as a substitute for extensive independent research before making your investment decisions. Global Forex Trading is merely providing this column for your general information. The views of the author are not necessarily those of Global Forex Trading, its owners, officers, agents or employees. In addition, any projections or views of the market provided by the author may not prove to be accurate. Global Forex Trading and Cornelius Luca will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained in this column. Global Forex Trading and Cornelius Luca do not render investment, legal, accounting, tax, or other professional advice. If investment, legal, tax, or other expert assistance is required, the services of a competent professional should be sought.