During the second day of Ben Bernanke’s testimony, the Fed Chairman revealed his worries about the subprime mortgage default crisis. He estimated $100 billion in losses on loans to homeowners with poor credit. Additionally, the Fed has not been clear about its exact forecasts for economic growth for the rest of 2007. Uncertainty and fear of a weak housing rollover into the economy has cause the dollar to drop against most major currencies. This morning the U.S. dollar traded at $1.3811 per euro, down from yesterday’s close of $1.3804. Today’s low marks a .2 percent loss this week. Against other currencies the dollar fell against the yen, the pound, the New Zealand dollar, and the Australian dollar. This week’s low of $2.0548 against the pound marks a 26-year low.
The U.S. currency’s bad shape marks a change from risky assets to more risk-aversive strategies. Samarjit Shanker, director of global strategy for the currency group of Bank of New York Mellon in Boston, states: “Subprime concern is pushing people to reduce some appetite for riskier assets, which will benefit the yen.†As it may benefit the yen, U.S. and European government debt has become more appealing as well. The yield on the 10-year U.S. Treasury fell to its lowest in 7 years as investors are looking to minimize risks in their portfolios. The yield fell below 5 percent for the first time in a month to 4.94 percent. Likewise, the German 10-year bund, which is used as Europe’s benchmark, fell 9 basis points to 4.45 percent. This marks a 17 basis point fall this week.
Outlook and Strategy: Will the EUR/USD break 1.40?
The remaining question among currency speculators is whether the EUR/USD will break 1.40. Economic data from the first half of the year has shown a very strong European economy compared to a sluggish U.S. one. Investors are expecting these trends of growth to continue, thereby forecasting two further interest rate hikes by the ECB. They also expect the Fed to hold onto its current benchmark. If these interest rate forecasts hold true, then a 1.40 EUR/USD break is very feasible. But other factors need to be considered as well. Nicholas Sarkozy, the newly elected French President, is a euro dove and feels the ECB holds too much power. He does not want to see a stronger European currency that will hurt European exporters. Â
A weak dollar may actually help the U.S. economy and in turn allow for a rebound. The weak currency is perfect for the tourism sector and will also help U.S. exporters. Barring a complete housing meltdown, the weak dollar may rebound if the U.S. economy enjoys steady growth. Currency analyst Tim Shea at FXCM states: “…while there’s still significant upside potential to 1.40, where there’s likely to be strong resistance, I don’t see a lot of reason for it to go beyond that, barring a big blowup event in the US. The weak USD is giving the US economy a big helping hand. Combine that with robust employment data, and we could see a good turnaround in the USD in the second half. A major divergence on the MACD on weekly chart data shows that the EUR/USD rally is looking pretty tired.†The conclusion is that the EUR/USD is unlikely to break 1.40.
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Posted: July 20th, 2007 under General.
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