Today's Forecast --USD: Dollar struggles as equities flounder 29th July 2008
The dollar hovered around yesterday’s lows in very light trading overnight, trading in a 1.5735-1.5752 range against the EUR and in a 107.27-107.50 range against the JPY. Equities in the region are weaker across the board after a weak start to the week on Wall Street as financial shares led the DJIA and S&P 2.11% and 1.85% lower respectively. The FDIC’s seizure of two smaller-sized failed commercial banks in the US over the weekend weighed on sentiment and cast new doubts over the health of the US’ consumer banking sector. Dozens of small to medium-sized banks remain on the FDIC’s watch list and they remain at risk as the US’ housing market corrections continues. On the policy front two Fed
speakers were on the wires yesterday. Minneapolis Fed President Stern (a voter) said that the credit squeeze in the US economy will persist for many months and said that its impact on growth could be yet to come. However, he said he expected growth in the coming quarters to average 1.5% and also a degree of resilience in consumer spending. Despite his cautious tone, FOMC members have generally been more assertive in downplaying risks of a recession. This paves the way for further action against inflation. Stern noted that headline inflation is too rapid but core inflation and expectations are “better behaved”. Meanwhile, Fed Governor Mishkin spoke on the subject of Fed communication and said that a numerical inflation target would help to anchor expectations. He said that having a credible inflation goal would aid international financial stability but he said that he wasn’t sure if central banks should coordinate policy
internationally. With housing and its effects on the consumer still a key driver of equity markets, today’s consumer confidence and Case-Shiller house price index will be crucial for equity markets, and in turn, the dollar. We are looking for the Case-Shiller composite 20 index to fall by 1.5%m/m and 16.4%y/y (cons. -16.0%, -15.3% prev.). Our economists
also note that consumer confidence number (UBSe. 54, cons. 50.0, prev. 50.4) may have reversed its recent weakening, consistent with the pattern in other sentiment measures. We continue to see EURUSD in a broader 1.53-1.60 range, with weakening Eurozone expectations to weigh heavily on the pair.
07-29-2008, 01:00 PM
Today's Forecast --USD: Dollar struggles as equities flounder 29th July 2008
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