Dollar Corrects as Geopolitical Uncertainties Rise (page 1 of 2)

US Dollar

The currency market never likes uncertainty, especially at such a geopolitically sensitive time which explains why traders sold the US dollar after hearing news that an unexplained gas odor is circulating in the air in New York City. This caused a brief shutdown of schools and the transit system. Given that Mayor Bloomberg has no good reason to explain the odor and neither does Con Edison, the reaction in the US dollar could be tied to mild speculation of terrorism. However as the gas passes in the city, so does the market's jitteriness. FX traders have a short attention span and we recall back in August when there was a similar mysterious odor that was never explained in the other boroughs of the city. Traders will soon realize that Friday's non-farm payrolls report is too strong to ignore, especially as a leading indicator for this Friday's retail sales report. Consumer credit for the month of November was exceptionally strong as the rise in credit card purchases confirmed the 1.0 percent increase in consumer spending during the same month. Another positive month is expected thanks to the low level of oil prices and a strong labor market. However retail sales are not due for release until Friday. There is no data on Tuesday, which means that we could tread water until the trade balance on Wednesday. The real wildcard is oil. There have been reports that Israel is planning to secretly destroy Iran's uranium enrichment facilities while Russia shuts down the Druzhba pipeline to Belarus. Both have the potential to heat up while temperatures in US begin to cool. After walking out in a t-shirt this Saturday to enjoy the 70 degree weather here in NY, we are prepared to don our winter jacket for the 28 degree low expected on Wednesday night. This sharp shift in temperatures should be very positive for oil prices and less so for the US dollar. Therefore as long as we don't have another gas leak tomorrow like we did today, there could be a continued correction in the US dollar after the three days of extensive gains last week.

Euro

Even though the Euro closed higher against the US dollar today, since breaking down after the strong US non-farm payrolls report on Friday, the currency pair has essentially done nothing. Traders are trying to quietly chip away at the 1.30 price level, but their efforts have yielded little results thus far. The European Central bank will be holding a monetary policy meeting this week and even though no changes are expected, comments from ECB President Trichet could decide whether the rock solid support below 1.30 can be broken. Oil prices are now trading not far from their one year lows which could encourage the head of the central bank to pare back his hawkish stance. If he does, it would certainly not be positive for the Euro. Meanwhile the big surprise today was the drop in German retail sales. Economists had originally been expecting a strong up tick in consumer spending after seeing the sharp rise in business confidence and the improvement in the labor market. However the prospects of an increase in the Value Added Tax actually restrained spending in the month of November. If we do not see a pickup in December, Germany could really be looking ahead to a meaningful slowdown in growth as individual households fail to benefit from the improvement in the corporate sector. Looking ahead, we have German trade data and industrial production due for release. The market is still expecting firmer numbers from the manufacturing sector. Should we see another downside surprise, the Euro could remain under pressure heading into the ECB meeting.