Archives: 2007 October

Forex trader became cautious this week ahead of the Federal Reserve meeting to set interest rates scheduled for Wednesday, October 31.

Perhaps it’s the Halloween date of the meeting that has forex traders slightly spooked. More likely it’s because it is very difficult to guess what the Fed might do as a follow up to last month’s 50 basis point interest rate cut in both the discount and federal funds rates.

Treasures had rallied sharply in recent weeks on the market’s perception that the Fed would likely decide on another half percentage rate cut following a similar reduction in September that surprised and pleased investors. But that view was in doubt and investors were reluctant to bid prices up on Monday.

As treasuries rallied over the past few weeks the US Dollar continued on its downward course as short term interest rates declined. Further interest rate cuts will likely keep the Dollar under pressure.

“The market may have gotten a little too optimistic,” said Tom di Galoma, head of Treasurys trading at Jefferies & Co. Traders are now expecting a .25 basis point rate cut.

Investors Monday also tried to reconcile the cautiousness of recent speeches by Fed Chairman Ben Bernanke and his central bank colleagues with traders’ a certainly that a rate cut is in the works. Fed officials in recent speeches have stressed that policy decisions at this time are even more challenging than usual.

While the Fed and Treasury probably want to see the Dollar continue to fall, no matter what they may say in public statements, as a weak Dollar helps the US export market over the short term, they probably are concerned about at some point triggering a sharp fast destabilizing Dollar fall.

The Canadian Dollar continues strong as the US Dollar falls out of favor against just about all currencies. Very early Monday morning in the US and at the start of the trading week in Europe the Canadian Dollar is trading at nearly 104.00 against the US Dollar.

Since the US Federal Reserve Bank bailed out the US stock market on September 18th with a 50 basis point cut in both the discount and the federal funds rate the US Dollar has come under increasing pressure in foreign exchange markets. After the nearly 367.00 point drop in the Dow this past Friday the “Bernanke Put” effort to save his Wall Street friends looks to be misguided.

A long list of challenges to equity values seems to be finally making stock investors concerned enough to start bailing out of stocks. With crude oil trading at about $90 a barrel, the sub prime mortgage market fallout becoming more servere, financial institution’s earnings under severe pressure, and soaring credit card debt coupled with record mortgage foreclosures, who can blame them?

The Fed is now in a really tough place. With the US Dollar under severe selling pressure a further cut in US interest rates will only accelerate the Dollar’s demise. It appears that the economy and stock market are about to buckle under the onslaught of bad news and disappointing corporate earnings which will only make market conditions more difficult for the Dollar.

Like the mess in Iraq there is no good or easy way out. Look for the US Dollar to continue to fall and for the currencies of prudent resource rich countries, like Canadian Dollars, to continue to gain strength.

A weak Dollar and tensions between Turkey, Iraq, and the US helped to push light sweet crude oil on the New York Mercantile Exchange to yet another record high above $88.00 a barrel.

The Turkish government’s decision Monday to ask the Turkish Parliament for permission to pursue Kurdish rebels into Iraq added to concerns about potential interruptions to oil supplies.

The long term bull market in crude oil has been assisted by a long term downtrend in the US Dollar. As the Dollar falls the price of commodities that are largely priced in Dollars , like gold and oil, tend to increase.

The mismanagement of fiscal and monetary policies in the US for an extended period of time almost guarantees that the Dollar will continue in a downtrend for a long time to come. Before the Dollar turns around there will likely be a true Dollar crisis with a sharp, sudden, fall in the Dollar that will amount to a worldwide panic out of Dollars.

The US Dollar is not at that stage yet, but seems to be on its way.

The Euro Dollar strong uptrend continues today as the preliminary October University of Michigan survey disappoints Dollar bulls. The U. Michigan survey was reported at .82 compared to an expected .84.

The Euro Dollar experienced a brief correction immediately after the better than expected Non Farm Payrolls report last Friday, hitting a low of 140.16 on Tuesday, Oct. 9 two trading days after the data was released. Since then the Euro has pushed forward and is trading at 141.70 as I write.

The US Dollar remains in a pronounced downtrend that will likely persist for quite some time. Do not be surprised to see the Euro trade up to 150.00 or so before the US Dollar is able to manage anything more than occasional corrections in a long term downward trending US Dollar market.