Senin, 01 Oktober 2007

Greenback Mired near Lows by Korman Tam

The dollar sold off across the board to end the week at fresh record lows against the euro at 1.4277 and multi-week lows versus the sterling near 2.0450. Fundamentally, little has changed in the US economic and interest rate outlook but with sentiment biased toward further Fed easing, traders have been given the green light to dump dollars. The economy remains in a precarious state with the housing market yet to reach bottom and burgeoning fears of slipping into recession.

While the barrage of economic data released this morning was mixed, it had little impact in the foreign exchange market. Inflation reports showed the PCE price index softer than expected, with the headline reading at 1.8% y/y and down 0.1% m/m. The core reading edged up by 0.1% m/m, albeit weaker than anticipated while the annualized figure fell to 1.8% from 2.1%. August personal consumption rose by 0.6%, up from 0.3% while personal income drifted to 0.3% from 0.5%. The September NAPM index tumbled to its lowest level since November 2001, falling to 437.6 versus 445.0 from August. However, the Chicago PMI reading exceeded consensus estimates for a decline to 53.3, instead rising to 54.2 from 53.4 a month earlier. The University of Michigan sentiment survey unexpectedly fell to 97.9, coming short of forecasts for 99.0 and down from 98.4 from August. The sentiment survey echoes the Conference Board’s dismal consumer confidence survey from earlier this week and is indicative of deteriorating economic fundamentals and recent market volatility.

We continue to look for more dollar weakness in the near-term. Next week’s US economic reports will provide additional clues on the state of the economy. The data consist of September manufacturing ISM, pending home sales, services ISM, durable goods orders, factory orders, and the September jobs report. Recall last month, the greenback sold off sharply following an unexpectedly dismal non-farm payrolls number, which declined by 4k. The September NF payrolls reading are seen posting a dramatic improvement to 94k.

Traders will also focus closely on central bank policy decisions from the Bank of England and the European Central Bank. The sterling came under pressure in the New York morning amid rumors circulating trading desks that the BoE would come in with a surprise rate cut. The currency quickly recouped its losses against the yen and the dollar, but the prospect of a BoE rate cut will remain fresh on traders’ minds.

Also worth noting, St Louis Fed President Poole said that the 50-basis point Fed rate cut was justified in order to help markets to recover. However, he said it is a mistake for markets to bet on further easing and policy would be determined from meeting to meeting. Poole also added that inflation expectations are firm, but the core PCE figures released today were moving in the right direction.

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