Looks as if the Euro is being heavily backed. I think the dollar should come back soon unless the Feds really lose it.
[Raymond I will send you a pm on where we can take our discussion.. Thanks for the book links, I agree generally with view presented]
Dollar gyrates on security worries
The dollar had a roller coaster ride on the foreign exchange markets yesterday with worries over US security creating turbulent trading conditions.
Early in London trading, speculative purchases of the euro helped push the currency close to $0.95. But traders said that the weight of long euro positions already in the market meant there were not enough new buyers to push the currency through the $0.95 level.
The euro made a second move up after reports of terrorist plans for a radioactive attack on the US. Traders later concluded that these reports were less alarming than had been thought. By the middle of New York trading, the euro was about $0.945.
Chris Furness, senior currency strategist at the economic consultancy 4Cast, said that the failure to break through $0.95 was no more than a short-term setback.
"It is clear that the sheer volume of long euro-dollar positions in the market is hindering the euro's progress," he said. "This may continue to be the case for a while but it should not be too long before the euro breaks higher again."
* All eyes are on the equity markets.
In recent weeks, the dollar has been slavishly following movements in the Dow Jones, to the exclusion of economic data. But this obsession with shares is something of a mystery.
Portfolio data for the US was a reminder that the lion's share of the current account continues to be funded by inflows into corporate bonds this year. The net inflow into equities was less than 10 per cent of the overall inflow of $79.92bn.
For most of 2001, equities played an insignificant role in the funding of the current account.
The S&P 500 and the FTSE Europe index are down 11 per cent so far this year.
So why have stocks become so important again for currencies?
First, there is a growing sense that overseas inflows into corporate bonds, which have been mainly responsible for funding the deficit over the past few years, can no longer be relied upon.
Several of the factors making corporate bonds attractive have been removed, said Russell Jones, head of currency research at Lehman Brothers in London. "When the Fed was cutting rates aggressively, there was the prospect of large capital gains by buying corporate bonds," he said. "This is no longer the case."
Corporate issuance has also subsided recently and since European investors are more keen to buy primary issues, this is likely to mean a slowdown in overall inflows.
Analysts are also worried that the recent spate of corporate scandals in the US will eventually erode confidence.
Another possible explanation lies in the lack of transparency of the US economy.
"At some point, other flows will have to take up the slack and traders have been making the judgment that equities are unlikely to fill the funding gap," said Bilal Hafeez, currency strategist at JP Morgan Chase.
With official data giving confused signals, analysts are looking instead to the stock market as a barometer of the performance of the US economy.
"Analysts are focusing on the headline indices for clues about the overall health of the economy," said David Bloom, currency strategist at HSBC.
* So far the euro has been rising by default, due to dollar weakness. This looks likely to be the case for some time. Economic data from Germany continues to disappoint the market, underlining doubts about the dynamism of the eurozone economy as a whole.
Figures released on Friday showed a 60,000 rise in German unemployment in May. Yesterday's retail sales in data for April showed a month-on-month fall of 2.4 per cent.
"Retail sales are a notoriously volatile series but recent data has been worrying," said David Bloom, currency strategist at HSBC in London. "If the euro is to push up more vigorously, we need traders not just to reject the euro but to accept the euro."
There is not much sign of this happening at the moment, he added.
news.ft.com |
