Was it ECB President Trichet's Intention to Help the Euro? (page 1 of 2)

DailyFX Fundamentals 10-04-07

By Kathy Lien, Chief Strategist of DailyFX.com

More Central Banks Ditch the US Dollar

After rebounding in the beginning of the week, today's drop in the US dollar indicates that not everyone is convinced tomorrow's non-farm payrolls report will be as strong as the market's 100k forecast. According to our Non-Farm Payrolls preview, there are just as many arguments for a weak report as there are for a strong one. With Fed fund futures pricing in only a 68 percent chance of an October rate cut and a less than 50 percent chance of a December cut, the market is clearly divided on the outcome of the Federal Reserve's interest decision later this month. The US dollar sold off the last 3 times that non-farm payrolls were released even though the report for the month of June was slightly stronger than expected. The market has been dollar bearish since the beginning of summer and traders were looking for any excuse to sell dollars. With the Euro trading above 1.40 however, the sentiment in the market has shifted. Instead everyone is looking for a bottom in the US dollar. Although we think that payrolls will be positive tomorrow, the fact that consumer confidence remains near 2 year lows and layoff announcements have become a near daily occurrence leads us to believe that the market's 100k forecast is lofty. As usual, we will be keeping an eye out for any revisions to the August number. As a rule of thumb for traders, if job growth was indeed greater than 100k, then we expect the dollar to recover further. However should job growth rise by less than 70k, we could see the dollar fall back to its record lows. Meanwhile today's dollar weakness stems from a variety of factors. Qatar announced today that their government backed Investment Authority only holds 40 percent of its investments in US dollars down from 99 percent two years ago. Vietnam also announced that they will be ending their purchases of US dollars. Although they only have $40 billion worth of reserves, their action raises fears that other Asian central banks like China, Korea, Taiwan or Singapore could follow suit. US economic data was also softer than expected with jobless claims and factory orders both falling short of expectations.

Was it ECB President Trichet's Intention to Help the Euro?

The European Central Bank left interest rates unchanged at 4 percent. Although the Euro initially sold off on the back of this announcement, it recovered quickly following ECB President Trichet's press conference. Despite repeated attempts by reporters to get him to address the level of the Euro or its impact on the economy, Trichet said point blank that he is not going to comment on the currency. Instead, the only things that he is willing to say are that it is important to exercise verbal discipline on exchange rates, exchange rate volatility is very counterproductive and he would appreciate a US position on the strong dollar. What he was very explicit about was the risks to inflation. The ECB believes that inflation will remain above their 2 percent target well into next year. Many could argue that Trichet has moved the ECB closer to neutral by reminding traders that he did not say monetary policy was accommodative and on balance, the risk to growth is to the downside. However the fact that he refused to comment on the exchange rate meant that he is not worried the current level. For currency traders, this was a green light for a move back towards the all time high of 1.4282.

British Pound Rallies After BoE Rate Decision

Although the Bank of England also left interest rates unchanged, the British pound actually rallied on the back of announcement because the BoE failed to release another statement accompanying their decision.