Euro Open: US Dollar Gains On Global Recession Fears - Why?

Daily Forex Fundamentals | Written by DailyFX | Oct 16 08 07:31 GMT |

The US Dollar has advanced against the major currencies as fears of a global recession replace the credit crunch as the primary concern across financial markets. Having led at the start of the crisis, investors are now betting that the US economy is also likely to lead in the recovery. Key Overnight Developments Crude oil tests lowest levels in over a year at $73/barrel Asian stock markets chalk up record loses, Nikkei down 11% Critical Levels The Euro gained a bit of ground in overnight trading, rising to test 1.35 before selling pressure returned late into the session to prompt a test of pivot point support at 1.3350. A break lower eyes the next hurdle at 1.3277. Sterling also rose for much Asian trading, testing above 1.73 to later settle around the 1.7250 mark. Asia Session Highlights With little market-moving data on the economic calendar, price action took on a corrective tone for much of the overnight session as the US dollar pared back losses after rising sharply in New York hours despite a dismal US Retail Sales release. Interestingly enough, it seems that forex price action is decoupling from stock performance even though the recent dollar gains coincided with fresh Wall St losses. Indeed, the previously strong inverse correlation between EURUSD and 30-year US Treasury Bonds has weakened to -74% having peaked at -84% last week. Why has the dollar gained? We wrote yesterday that 'traders are apparently taking a step back from the euphoria of recent days…to re-assess the fundamentals.' This has renewed fears of global economic slowdown, pressuring stock markets lower once again. Markets are forward-looking, so the operative question investors are asking themselves given the broad nature of the downturn is: 'Assuming everything is going down, who will rebound first?' This line of thinking seems to favor the greenback considering US authorities were the first to address the current malaise. Having led at the start of the crisis, the US economy is also likely to lead in the recovery. Euro Session: What to Expect The spreading economic slowdown looks poised to claim Switzerland as its most recent victim: Retail Sales are expected to grow a meager 0.8% in the year to August, a marked slowdown from July's 6.2%. The mountain nation relies on demand from the European Union to absorb 60% of their exports, making it highly sensitive to economic slowdown already evident across the countries of the regional bloc. Indeed, the ZEW Survey is forecast to show investor sentiment sour again in October after a sudden uptick in September spurred on by expectations of a rate cut from the SNB as inflation moderated. After Governor Jean-Pierre Roth and company participated in the coordinated 50-basis-point interest rate cut designed to thaw frozen credit markets, markets have pared back expectations of further easing. Trading in overnight index swaps point to inaction for the next 12 months, so it is reasonable that investor confidence would ease as Swiss businesses look unlikely to get monetary relief even as the global economy falters. On balance, the US Consumer Price Index announcement will likely offer the most market-moving potential as it is released late into the session. The shift in the markets' consensus from the 'decoupling' scenario (prevalent for much of the first half of the year, wherein the US would decline in isolation as the world economy continued to grow) to that of a broad, global downturn has put US fundamentals at the forefront for investors looking to time the bottom. This plays well to the aforementioned reasoning for recent US dollar strength as the markets look to States as the proverbial 'dove carrying an olive branch', signaling the crisis has begun to recede. DailyFX Disclaimer Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.