Dollar Mired Near Lows by Korman Tam

The dollar continues to reel from last week’s 50-basis point Fed rate cut, falling overnight to a fresh record low against the euro at 1.4129 and stumbling versus the sterling to 2.0316. Renewed fears of a faltering US economy will continue to drive the foreign exchange market this week as concerns of a possible recession weigh on the greenback. However, given the abrupt nature of the Fed’s aggressive ease, traders must keep a close eye on US inflation data for fear that the 50-basis point rate cut may strengthen inflationary pressure over the coming quarters.

Economic data slated for release this week will provide further clues on the US outlook, with reports to shed light on growth, the housing market, inflation, manufacturing, and consumer sentiment. On the whole, consensus estimates look for weaker data compared with the previous releases. The housing market slump will continue to lead the deterioration in US fundamentals, with August existing home sales seen falling to 5.49 million units, versus 5.75 million units previously and new home sales forecasted to drop to 830k units compared with 870k units in July. The final reading of Q2 GDP is estimated to be revised lower to 3.9%, from 4.0%, while the Fed’s preferred gauge on inflation is seen unchanged in Q2 with core PCE standing pat at 1.3%. Additionally, durable goods orders and Chicago PMI will provide more clues on the extent of the slowdown in manufacturing. Although durable goods orders are typically a volatile figure, estimates are calling for the number to fall by 3.1% in August, reversing the previous month’s 6.0% increase. The excluding transports reading is also seen declining, down by 1% versus a 3.8% gain a month earlier.

With additional monetary policy easing expected from the Fed this year, particular emphasis will be placed on the outlooks for central bank decisions from the ECB, BoE and BoJ. Among the banks, only the ECB is expected to maintain its current tightening cycle with another 25-basis point rate hike before year-end. However, economic data from the Eurozone will be closely scrutinized to assess the impact thus far on the region’s economy from previous rate hikes. Traders will turn to Germany’s September Ifo sentiment survey, due out early Tuesday morning at 4:00 AM, and is seen softening from August. The September Ifo expectations component is seen declining to 99.5, down from 100.4, while the current conditions figure is forecasted to fall to 111 versus 111.5.

Meanwhile, both the Bank of Japan and the Bank of England are expected to leave policy unchanged for the remainder of the year given the current global and domestic economic outlook. The BoE is even anticipated to cut rates given tightening credit conditions and the impact of global financial volatility on the UK economy. Later in the week, traders will digest Q2 UK GDP, seen unchanged at 0.7% q/q and 3.0% y/y.

A barrage of Japanese economic data is due out this week and will provide further clues as to if and when the BoJ may raise rates again. Our view is for the Bank to remain on hold until Q1 2008. The reports slated for release include the August labor report, retail sales, manufacturing PMI, CPI, housing spending, industrial production, and housing starts. With exceptions in household spending and industrial production, the reports are largely unchanged from the prior readings. However, industrial production is estimated to post a strong gain, improving by 3.2% in August versus a 0.4% decline in the previous month. Household spending is forecasted to gain by 1.2% compared with a 0.1% decline in the prior month.