RSSWhat Drove the US Dollar to a 6-Month High?
By Kathy Lien | August 27, 2008 | 12:32 PM | 0 Comments
The troubles in the US financial sector continue to be the biggest stories of the day, driving the US dollar to a 6 month high against the Euro. The parallel moves in both the greenback and the Japanese Yen indicate that we are seeing another bout of risk aversion. Yesterday, the story was about a Kansas Bank being shut down by regulators and today, a mortgage broker, which once originated $4 billion in loans, announced plans to close in a few weeks.
This follows news from the FDIC (Federal Deposit Corp) that the number of banks on their watch list has increased 30 percent to 117. As this list grows, so does the probability of a major blow up in the financial sector. Therefore it is no wonder that risk aversion continues to drive the markets, especially as gold prices increase $4 a barrel.
Although US economic data and the minutes from the latest FOMC meeting were also dollar positive, most of the action happened in Europe. Both consumer confidence and new home sales beat expectations, but traders remain skeptical about the recovery in the US economy. The recent drop in oil prices has helped to stave off a more serious downturn, but with Hurricane Season still underway, a major storm could easily reverse that trend.
As for the FOMC minutes, the Fed lowered their GDP forecasts for the second half of 2008 and 2009 and continued to warn about inflation risks. An interest rate hike will definitely be the next move that the Fed makes but the timing is still unclear. According to Fed Fund futures, the Federal Reserve will remain on hold for the remainder of the year. Looking ahead, durable goods orders are due for release on Wednesday. Slowing growth in the month of July is expected to drag on the sales of items to made last for more than 3 years.
Overall, we still believe that the US economy is headed for slower growth, but for the near term, the path of the dollar will be less dependent upon US data and more dependent upon the trend of oil prices and the market’s appetite for risk.
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