Euro Hits Record Highs as Investor Confidence Falls (page 1 of 2)

DailyFX Fundamentals 07-15-08

By Kathy Lien, Chief Strategist of DailyFX.com

US Dollar hits record lows: What could stop the bleeding?

The US dollar hit a record low against the Euro as risk aversion continues to seep through the global markets.

Stock markets have sold off around the world on the fear that another financial market crisis could be right around the corner.

Despite the Federal Reserve and US Treasury's attempts to assuage the markets, traders are skeptical about whether the proposals they have offered and the measures that they have taken thus far are enough.

The primary theme across the markets is a reduction of risk. The sharp intraday reversal in oil prices was due entirely to one bank taking risk off the table as most commodity market bets have been to the long side.

The CBOE's Volatility Index (VIX) also continues to climb, confirming that traders are nervous.

In his testimony on the economy and monetary policy, Bernanke grew more concerned about growth but remained critical of inflationary pressures.

He expects growth in the second half of the year to be 'appreciably below trend' as weakness continues to hit various sectors of the US economy.

Retail sales last month was much weaker than the market expected, with spending rising by only 0.1%.

Stripping out gasoline receipts, retail sales actually dropped 0.5%.

Discretionary spending has been seriously hurt by higher gasoline prices and a weak labour market, forcing consumers to cut back on purchases of cars, electronics, furniture and even food.

However underscoring the Fed's difficulties continues to be strong inflationary pressures.

Last month, producer prices grew by the fastest pace on an annualized basis since 1981. The troubles in the financial sector have extended beyond Fannie Mae and Freddie Mac - the bigger fear right now is a repeat of IndyMac and Bear Stearns.

Given current market conditions, forget about a rate hike this year. It is time for Bernanke to shift his focus from inflation back to supporting the financial markets and growth.

What could stop the bleeding in the US dollar? A big surprise from the US government. At the end of the day, the Bush Administration will come up with something.

It is clear that the government's priority is to return stability to the financial markets. President Bush said this morning that the government has the power to expedite a recovery. Bernanke added that additional stimulus must be timely, albeit temporary.

What the Administration needs to do is to restore confidence in the US financial markets and banking sector.

Viable long term solutions include nationalization of the GSEs, give debt holders a haircut on rates, or a managed bailout in which stockholders, creditors, taxpayers jointly share the bill (these proposals are from Nouriel Roubini's RGE Monitor).

Meanwhile expect more potentially market moving US data tomorrow including consumer prices, industrial production, and the minutes from the last Fed meeting.

Euro hits record highs as German investor confidence falls to a record low

It is ironic that the euro soared to a record high even though German investor confidence hit a record low.

The German ZEW survey, of analyst sentiment has been skewed towards pessimism for months, but the combination of the recent rate hike, surging inflationary pressures and weaker domestic and global growth sent confidence tumbling.