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Lack of Economic Reports Shifts Focus to the Dollar

James Hyerczyk from ForexHound.com at 11/11/09


The lack of economic reports today is shifting the focus by U.S. equity traders to the U.S. Dollar.  The prospect of the Fed keeping interest rates low for a “prolonged period” of time is helping to boost stock prices overnight as investors continue to treat the Dollar as a carry currency.  Because of the recent Fed FOMC decision to keep interest rates historically low, bullish equity traders have a 30-day free ride.  In other words, there is nothing in the economic picture in the short-run that could derail the current rally.


The Treasury market is closed because of Veteran’s day so Treasury futures have very little news to guide them.  The rise in the stock market is once again driving up yields, which is pressuring prices.  Investors are asking for higher interest rates in order to compete with the yields being offered by the stock market.


The U.S. Dollar hit a 15-month low against a basket of currencies last night on the prospect the Fed will keep interest rates at low levels for a prolonged period of time.  This assumption is based on last week’s Fed FOMC statement and recent comments from a Fed official suggesting that unemployment is the major concern.  This serves as a hint that the Fed is not likely to begin hiking rates until the U.S. jobs issue begins to post a recovery. The Dollar is trading weaker on this news versus all major currencies except the Japanese Yen and British Pound.


Excessive volatility hit the December British Pound early this morning following the release of the Bank of England’s forecast for economic growth and inflation.  In the report, the BoE warned that the U.K.’s economic recovery was just beginning and continuing strength during the recovery period remains “highly uncertain”.


In other news, China announced a major departure in how it determines the value of its currency the Yuan.  In a statement on Wednesday, China said it will consider using the valuations of major currencies in guiding the price of the Yuan.  This statement suggests that China will begin to move away from using the Dollar as a peg.  This practice has been followed since the middle of 2008.


December Gold soared to a new all-time high overnight and is holding on to most of its early gains.  Upside pressure is being provided by the weaker Dollar.


The weaker Dollar is helping to boost crude oil prices.  Speculation as well as higher crude oil and equity prices, are also contributing to the support.  As long as there is nothing to stop the Dollar from falling, look for crude oil to remain firm.  Today’s supply and demand report will ultimately determine the tone of today’s market.

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