Browse
related articles
By Kathy Lien, Chief Strategist of DailyFX.com
US Dollar: A puppet of the Stock Market?
The rollercoaster ride in the stock market also hit the currency market today.
At one point, the rally in the US dollar evaporated as the stock market collapsed on fears that the financial sector could be in for more trouble.
After having been up more than 100 points at the beginning of the US trading session, the Dow Jones Industrial Average choked back all of those gains to end the day down 56 points.
This was not before falling more than 160 points, then reversing back to flat and then dropping once again.
The meltdown in stocks was triggered by Lehman Brother's warning that Fannie Mae and Freddie Mac could be forced to raise as much as $75bn in capital to offset write downs and meet new accounting rules.
Fresh trouble in the financial sector is the type of uncertainty that the market cannot handle right now. The new earnings season is about to begin and Fannie and Freddie's problems resurrect concerns about the resiliency of US companies in the face of soaring prices and falling demand.
The US dollar has merely been a puppet of the stock market today as liquidation out of US stocks lead to liquidation out of the US dollar.
Normally, hawkish comments like those from San Francisco Fed President Yellen would help the dollar, but today, traders were more worried about the problems in the financial sector and how Yellen's comments suggest that there will be no relief from the Federal Reserve.
Pending home sales, wholesale inventories and consumer credit are due for release tomorrow. These are Tier 2 economic data which means that they will not be particularly market moving.
We still believe that the US dollar has bottomed and as such, we look for more gains against the Japanese Yen and Euro.
The US economic calendar is very light, but the disappointments in German industrial production could lead to even more disappointments for other Eurozone reports this week, which would weigh on the EUR/USD.
Euro Fundamentals turning sour
Last Thursday, ECB President Trichet shocked the currency markets by saying that he has no bias about future monetary policy, sending the Euro plunging against the US dollar.
The Euro came under further selling pressure after the German industrial production dropped 2.4% in the month of May, which compares to the market's call for a 0.3% rise.
The drop comes in sharp contrast with the rebound in the manufacturing PMI report and suggests that the trade numbers on Wednesday could be weak.
Cracks in the Eurozone economy are beginning to show and these problems could be exactly what prevented Trichet from being more hawkish.
Either way, the ECB is done for now which should limit any gains in the Euro. We still believe that no bias equals no action in the EUR/USD so expect the 1.53 to 1.59 trading range to remain intact for the rest of the summer.
Meanwhile the unemployment rate in Switzerland continues to drop. The jobless rate hit 2.3% last month, the lowest level in six years. This has helped the Swiss Franc hold near its 17 year highs against the Japanese Yen.
Pound Sterling: UK economy could fall into a recession
The UK economy is worsening which is having a big impact on the British pound.
Last week economic data indicated that the service, manufacturing and construction sector all contracted in the same month.
Kathy Lien, Chief Strategist, Daily FX
