Interest Rate Hopes Impede Dollar Fall

USD

The US Dollar recouped some of its losses from the previous session in Tuesday trading and was mixed overall.

Forex Traders were talking about the ADP jobs report which comes out on later on today and is estimated to show that more jobs were created than lost in December, the first time in two years that this would have occurred.

Should the data prove to be accurate, it could lead to a February interest rate hike at the next Federal Open Market Committee meeting.

Dollar supporters agree that this year could be particularly difficult for the Greenback. With looming debt crisis, a fledgling real estate market that is increasing foreclosures even with the stimulus funds and a 10% unemployment rate that will likely remain high through at least the third quarter.

It is for this reason that any glimmer of hope for an interest rate hike garners positive attention. The ADP jobs report will be followed by Friday’s non-farm payroll, the official government number and traders are hoping both numbers fall in line with expectations – however in recent months the ADP was not always a great indicator of the NFP.

At 11:00 PM GMT, the US Dollar was trading up .3% to the Euro to 1.4365, down .92% versus the Japanese Yen to 91.65, up .58% to the British Pound Sterling to 1.5993, down .26% against the Canadian Dollar to 1.0388 and down .16% to the Australian Dollar to .9117. The Dollar also made marginal gains against the Swiss Franc, rising .09% to 1.0331.


Analysis: EUR/USD

Despite everything that is happening in the US, the Euro is signaling that it is in a corrective phase now against the US Dollar. After a stellar 2009 for the Euro, largely a result of the declining Dollar, the trend seems to have ended in December.

Technically, the pair could test the horizontal support line of 136 and hover in that vicinity forming a higher bottom. Traders are lining up orders around 147 in the pair, a mark which is the 50 day moving average.

Unpredictability plagues every angle of USD

The problem that the US has with consistent signs of recovery came through on Monday as two separate reports showing two totally different things were released.

While the manufacturing report showed a steady increase in US production, a clearly positive sign that indicates some semblance of growth, however any bounce that the Dollar took off of this was stifled by a housing report which showed that prices have now fallen – at least in November/December – to the lowest level in years.

The continued duality of this mythical recovery is affecting Forex traders and their ability to adequately trade in any of the USD related pairs. The issue here is misinformation, not necessarily by news organizations, but by the government agencies and private parties that comprise the “independent” review boards for various sectors.

Take the employment numbers for example; ADP which is the largest payroll processor in the US comes out with a report, usually on Wednesdays, that shows the total number of people that they processed payroll for each week.

If the number rises, you know that more people are employed, if the umber drops you know some were terminated.

For the past month and a half, the ADP has come out showing an increase in layoffs, while the government report – the Non-Farm Payroll – has shown less layoffs. They both cannot be right and yet they both are representing the same data.

The difficulty in predicting which way the recovery pendulum is swinging is clearly evident here as there is no guarantee that one piece of data will be supported by another, a former given in Forex trading.

So, as we continue to build on the New Year, we must remember to proceed with caution. What you see is not necessarily what exists – in charts, in data and in rallies and downtrends.

What used to be somewhat predictable has now become impossible to peg and scouring the data will not help clarify – the market in USD is running on whims and psychological factors. As we have seen in the past with stocks, this is a dangerous pattern and we can only hope it settles down soon.

A European Dilemma

The Eurozone has a problem as the New Year rings in. The few countries that have been demonstrating their economic viability in the 27 nation economic zone have been offset by a handful of smaller, less developed nations that are experiencing aftershocks in the wake of the worst recession in decades.

Countries like the PIIGs (Portugal, Italy, Ireland and Greece) started 2009 by making news as their economies faced disaster; they ended the year in the headlines again as their sovereign credit ratings have been slashed by the major independent agencies.

The problem with the Eurozone is a simple one and fixing it means admitting that the Free Trade and joint economic experiment was fatally flawed.

As nations that are independent economic entities, such as the US and Great Britain, the latitude they have in combating inflation and deflation by altering their monetary policy is evident.

The response that they have to fluctuating valuations is based on their control of their interest rates as well as their ability to effectively “print” more money. The European nations that comprise the Euro (Britain is a EU member but has yet to adopt the single currency) do not have such luxuries.

So, in effect what this means is that when Greece is faced with an internal crisis, in which their debt load is too large for their economy to handle as a result of dwindling tax revenues, the recourse that one has seen in the US and England, which is issuing debt instruments to fund their recovery, is not available (be that a policy in controversy as it may, it still is a policy… ).

As a nation that relies on the Euro, ceding the use of their native Drachma upon joining the EU, they are bound to the whims of the European Central Bank, which is slow or hesitant to act for sake of individual nations.

Had Greece been allowed to float their own bonds, perhaps the situation there would not be as dire as it is today; had the ECB perhaps allowed a specialized bond just for Greece, or any of their needy nations, perhaps the same would have been true.

As we begin a new decade of trading currencies, we look to the solutions for these issues – and while it is not even apparent to those within the ECB that something needs to get done, as the Euro continues its slide in the face of weakness in some of their member states, perhaps they will address the obvious. We can only hope.