THE ALMIGHTY DOLLAR

Policymakers in the United States usually claim that they are in favor of a strong dollar. We often hear that a strong Dollar is in the best interests of the world, especially Americans.

Now let’s talk about the truth: US Policymakers are very pleased that the dollar is weak and getting weaker.

Why?  The theory is that a weak dollar at this point in the business cycle will actually benefit the United States, ignoring the risk that foreign investors will lose faith in the greenback and not buy U.S. debt.  It works like this:  a weak dollar helps exports while curbing imports. Besides reducing the US trade deficit, a weak dollar gets people to buy less, especially from other countries.
This is definitely a plus for industries like the US auto industry, which has seen many customers abandon their products for cars made abroad. It logically also benefits many of their suppliers. About half of American companies’ earnings are generated abroad. The stronger other currencies are versus the USD, the more attractive American products are to foreign countries.
A weak dollar also reduces the need for U.S. firms to outsource, and fire American workers. If the dollar gets weak enough, some jobs might actually be brought back to the US.
As for the risk that foreign investors will lose faith in the greenback, essentially no other currency rivals the dollar when it comes to safety and ease of moving funds in and out.  So this is not seen as a huge risk.
But what about all of the businesses that rely on imports for re-sale to the American consumer?  These businesses will undoubtedly need to raise their prices, making non-US goods much more expensive for the consumer.  This brings up the potential by-product of inflation.

According to Economics 101, the value of the dollar (or any other currency) is determined by supply and demand.

Today, world financial markets are overloaded with dollars due to the actions of the Federal Reserve. But lately, the central bank has been hinting about taking some of these dollars back, once it thinks that the economy is in recovery mode.  Eventually, it will be forced to do just that, especially if the weak dollar leads to inflationary concerns.
Does this suggest that the battered buck is more likely to be stronger rather than weaker a year or two from now? Yes. As dollars become less plentiful, their value will rise as will foreign investor willingness to hold them. The threat of inflation will diminish as well.
Easy forex bottom line:  Near-term expect the dollar to continue to suffer.  The EURUSD looks headed towards breaking the critical 1.5000 level, and will encounter some selling pressure at 1.5010. Looking out one to two years, don’t rule out a sustained Dollar rebound.

EURUSD : Support 1 – 1.4920    Support 2-1.4850          Resistance 1- 1.5000      Resistance 2- 1.5010

10/20 Market Commentary

The Institute for Supply Management’s (ISM) non-manufacturing business index fell 0.3 percentage points in October to 50.6 from 50.9 in September. Economists were expecting the index to rise to 51.5.

This moderate decline in the index can be attributed to declines in employment, inventory, and imports which outweighed the growth reported in price and new export orders. Imports, inventories and employment contracted.  Imports fell 5.5 percent to 46.  Inventories contracted 4.5 percent to 43.  The employment index fell 3.2 percent to 41.1.  New export orders rose 5 percentage points to 53.5 and prices rose 4.2 percentage points to 53.
The major knowledge to come out of the report was that new export orders had their best showing since October 2007, but the headline number was pulled down by the disappointing drop in the employment component, which saw its worst reading since May.

The employment component pullback counters the brief optimism after Monday’s much-improved ISM manufacturing report, which showed an increase of 6.9 points in the employment component to 53.1.  However, The ISM manufacturing report has more history behind it than ISM services, and has a tighter correlation to the NFP report on Friday.  Manufacturing only makes up about 9% of non-farm payrolls as opposed to 69% for private services, but manufacturing employment can be quite volatile, so it can heavily sway the payrolls readings.

In total, FX traders should know that the net effect of today’s ISM reports should not be significant, with perhaps a little more risk of a slightly weaker than expected number. Combined with this morning’s as-expected ADP report, there probably won’t be any major NFP forecast revisions from the end of last week, when Reuters  showed a median nonfarm payrolls forecast of -175k.

Nevertheless, today’s news contributed to a broad-based rally in the Eurodollar, as seen in the below chart.  This indicates that many easy FOREX traders may have been expecting major disappointments, and thus today’s roughly as-expected actual figures were in effect a positive surprise, contributing to Euro strength and Dollar weakness.  Tonight’s FOMC statement will likely have a strong impact on how the Eurodollar actually finishes the session.

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Yesterday, we saw US consumer confidence as measured by the Conference Board fall unexpectedly in September to 53.1, well below the 57.0 economists were expecting, as more consumers saw current business conditions as poor and jobs as hard to get.  Consequently, the US stock market stumbled and the dollar rallied.  This morning, the USD is sliding lower versus its major counter-currencies on increased risk-appetite due to a surge in Asian stocks overnight.  This is merely more validation of how the USD is following movements in the global stock markets for risk-appetite cues. In order to predict the near-term direction that the dollar will take, one cannot deny that it would be most effective to gauge where the US stock markets may be going.

Let’s take a look at a few facts that are noteworthy for this analysis:

1.    The most optimistic expectations are for continued US job losses at a slowing pace. Even for those still holding jobs, this puts downward pressure on wages. The US consumer is still getting poorer
2.    US exports are down 25% from their June ’08 peak
3.    Credit growth remains negative
4.    Home sales continue to drop despite record low interest rates, deeply cut prices, and tax breaks for first time buyers
5.    Business inventories continue to fall, you can start with Forex trading demo account to see what is it about.
6.    Looming need to cut stimulus, raise interest rates
7.    Yields are falling on US government bonds.  This indicates investor risk-aversion.

All of the above points are potentially negative for the US stock markets and positive for the dollar.

The US ‘optimistic economic recovery’ theory
FOREX traders will get a few more pieces for this puzzle this week. This is a news- packed week for the greenback, starting with today’s crucial ADP Non-Farm Employment Change report, which is a big hint at Friday’s official and more important NFP reading, the most important US economic indicator.  Look for indications of strength or weakness in the ‘optimistic economic recovery’ theory.  Signs of weakness will boost the dollar and bust the stock market, and vice versa.

Fundamental Near-Term Outlook for US dollar: BULLISH

Overall US Retail Sales numbers came out better than expected at 2.7% versus 2.0% expectations.  Excluding auto (which were helped by the Cars for Clunkers program) and gasoline sales, the number was a rise of 0.6%, which was also higher than estimates.  On the news the dollar has strengthened.

Forex traders are positive about the news as it relates that US consumers are heading back to stores and aren’t as pessimistic about the future as thought.  The results occurred even though initial surveys reported that August “Back to School” sales were terrible.

Even though the results were better than expected, Forex traders will probably be looking for additional confirmation of positive sales before deciding that the US consumer is back. We believe the results may have been assisted by “clearance sales” of retail chains that enticed consumers that had been postponing their purchases.

How will this affect on the dollar?

Interestingly though, is the fact that the dollar was able to rally even as stock indexes spiked higher.  This conveys that Forex traders see the US consumer as the main engine of growth needed to fix the US economy.  Therefore, although the current precedent is for positive US economic news to be negative for the dollar, we may see a shift where consumer related good news leads the dollar higher.

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Easy forex  reserves declined $1.08 billion to $261.31 billion for the week ended June 5 compared with $262.30 billion in the previous week. beginning of the week until 06:00pm GMT Thursday , During the period, foreign currency assets dipped $…Top financial officials from the G8 nations…Given the rapidly plummeting value like a real forex brokwr of these holdings due to exploding levels of U.S. previous week, the Reserve Bank of India said in its weekly repor for full easy forex 

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