U.S. Equities Boost Helps Dollar

Better than expected profit reports by Amazon.com and Boeing marked a strong opening for U.S. stocks this morning. Average profit growth from 40 percent of companies in the S&P for the second quarter rose 9.6 percent. This number beat expectations of 5.8 percent growth by Bloomberg analysts. In response, the dollar has made a major recovery. The dollar traded at $1.3709 against the euro this morning, after having reached a record low of 1.3852 yesterday. This change in direction could mark the start of a major rebound. The U.S. dollar had fallen 1.5 percent this month against the euro. Camilla Sutton, co-head of currency strategy in Toronto at Scotia Capital Inc., states: “Currency markets are looking to equities for direction.”

But investors need to be aware that other factors on the euro side are in play as well. Additionally, today’s report on existing homes sales by the National Association of Realtors was disappointing. Looking on the European side, the euro also fell against the pound and the Canadian and Australian dollars. There has been much speculation that the U.S. housing slump may affect the Euro region as well. Gareth McHale, currency trader at Bank of Ireland Global Markets, says, “There are rumors that a couple of German Banks will be downgraded on subprime.” This year’s booming European economy may see a future slowdown.

Currency Outlook and Strategy:

The long overbought EUR/USD pair may not be breaking 1.40 anytime soon as sellers have reluctantly accepted lower prices. In the short term expect some uncertainty, especially as today’s report on existing homes sales fell below analyst expectations. The National Association of Realtors reported a 3.8 percent drop in existing homes sales, which puts the current annual rate at 5.75 million, the worst since November 2002. Analyst expected an annual rate of 5.86 million. Additionally, Countrywide Financial Corp. stated yesterday that the increasing number in homeowners falling behind on home equity-loan payments has cut into profits. Moreover, this news supports Bernanke’s lowered GDP growth forecast for 2007 stating the U.S. housing slump has been the biggest detrimental factor in the economy.

There is no doubt the poor U.S. housing market will continue through 2007. The question is whether the rest of the economy will be affected as more homeowners are having a hard time making their mortgage payments. This spells uncertainty in the long turn. In the short term the EUR/USD is unlikely to go back to last week’s high seeing that the momentum in the pair has been exhausted.