The US dollar showed strength against its major counterparts during early Asian deals on Monday. The greenback strengthened as traders awaited the outcome of the ongoing G-10 meeting in Basel, Switzerland. Heads of major central banks are expected to make their stance clear later today on efforts to calm the currency market. The buck also jumped against the New Zealand dollar in the session despite stronger-than-expected trade balance data from New Zealand.
The first few sessions of the first week of 2008 saw little reaction in the currency market as investors were just back to their desks after Christmas and New Year holidays. The US dollar experienced mixed trading against major currencies in response to mixed economic reports.
The HICP inflation data from the European Union and PMI readings from Europe and North America had little impact on the market, as traders focused on Friday`s US December employment data.
A Report by the US Department of Labor showed that only 18,000 jobs were added to the country`s non-farm payrolls against market expectation of 70,000 and compared to 115,000 in November. Also, the unemployment rate jumped to 5% from 4.7% recorded in the previous month.
The US currency slumped across the board amid the jobs report, but it closed the week mixed against the majors. The greenback posted weekly gains against the pound and dollars of Australia, New Zealand and Canada. At the same time, on Friday the buck declined to 5-week low of 1.482 against the euro on speculation the FOMC will consider a 50 basis point cut in the benchmark interest rate later this month.
While slowing economic growth and rising unemployment are pushing the US Federal Reserve toward further rate cuts, inflationary pressures due to very high oil prices may become an issue to contend with. Oil traded above the $100 mark before easing to $98 a barrel towards week`s close.
The dollar reversed some of the losses it suffered amid the jobs report as the Federal Reserve announced Term Auction Facility with a 50% increase in the loan offered. Through TFA, the Fed would offer $30 billion in the auction to be held on January 14 and another $30 billion on 28 January. The central bank infused a total of $40 billion in two equal premiums of $20 each when it did the same last month.
The Fed action is likely to ease liquidity crisis, tempers hopes of a bigger cut in the official cash rate next time. Treasury secretary Henry Paulson told last November that a strong dollar was in the interest of the US.
The week ended January 4 also witnessed unwinding of carry trades, which strengthened the Japanese yen and the Swiss franc against majors. Among the two, the yen closed higher against the Swiss Franc. Recession fears in the US continued to prompt investors flee from riskier assets, and hence high-yielding currencies such as the Aussie and the kiwi suffered losses.
The British pound headed south against the greenback despite the release of slightly better than expected PMI readings from the UK. Friday`s Bank of England releases showed that the November M4 money supply growth exceeded that of the previous month, but decline in the bank lending strengthened the case for another rate cut by the central bank.
The euro-dollar pair strengthened to a 5-week high of 1.4826 before closing the week at 1.4747 Friday. The pair remained in an upward channel after it touched a 2-month low of 1.4312 on December 20th and since then, the euro gained over 3.5% against its US counterpart. Technically, the pair is testing a strong resistance at the current level and a break above the same would take the pair towards it all time high of 1.496. However, if the dollar bounces back, the pair may test support around the 1.452 level.
The British currency is residing at a medium term support around of 1.97 against the dollar as of now. The pound-dollar pair hit a multi-year high of 2.1163 on November 9, and has declined over 7% since then. On the downside, key support is seen around the 1.95 level for the British unit.
The dollar also strengthened against the Canadian dollar in the past week. The pair fell below parity and reached as low as 0.9760 towards end of December. But the buck gained more than 2.9% against the loonie by Friday. The US currency equaled 1.0045 Canadian dollars on Friday before closing the week just 5 pips down.
Against the Japanese yen, the dollar fell to a 5-week low of 107.93 on Friday before closing the week`s deals at 108.54. The dollar-yen pair that lost ground after hitting a multi-week high on December 27 dropped more than 5.8%, thereafter. A break below 107.24 will mean a multi-year low for the buck. The dollar-franc pair also had a similar action in recent deals, which closed the week at 1.1086 after reaching as low as 1.1023, a 5-week low for the US unit. Economic calendar of the week is light. Nevertheless, traders are likely to focus on the monetary policy announcements by the Bank of England and the European Central Bank. Investors expect the central banks to leave their key rates unchanged on Thursday. The current official cash rate of the BoE is 5.5% and that of the ECB is 4%.
In addition to the rate decisions, consumer confidence data from the U.K and the European Union are expected during the unfolding week. December unemployment report from Switzerland and Canada and November retail sales report from Australia are also likely to attract the attention of traders.
Speeches by Fed`s William Poole, Thomas Hoenig, Eric Rosengren, Charles Plosser and Dennis Lockhart, ECB President Jean-Claude Trichet and the Bank of Japan`s Toshiro Muto are also likely to be in spotlight।
Source: http://www.forexsites.com/home.asp?StoryID=0&ntypeID=fxstory
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