Will the US Dollar Continue to Rally? (page 1 of 2)

DailyFX Fundamentals 07-23-08

By Kathy Lien, Chief Strategist of DailyFX.com
DailyFX Fundamentals 07-23-08

By Kathy Lien, Chief Strategist of DailyFX.com

- New Zealand Dollar Hits 6 Month Low After RBNZ Rate Cut
- Will the US Dollar Continue to Rally?
- Euro Could Come Under Further Pressure on German IFO Report

New Zealand Dollar Hits 6 Month Low After RBNZ Rate Cut

For the first time in 5 years, the Reserve Bank of New Zealand cut interest rates by 25bp to 8 percent and signaled that rates will be cut even further. The futures curve is pricing in 5 rate cuts over the next 12 months and this is the first of the five. The New Zealand economy has been struggling and could be headed for a recession. The dovish comments from RBNZ Bollard will keep the currency under water for some time. Meanwhile the Australian and Canadian dollars have failed to rally despite stronger than expected consumer prices. Their weakness is of course due to the drop in oil and gold prices. Like the rest of the world, inflation has hit Australia and Canada with food and energy prices on the rise. There is no more data from any of three commodity producing countries this week, which means that their fluctuations will largely be dependent upon on the fluctuations of commodity prices and the US dollar.

Will the US Dollar Continue to Rally?

Nothing stopped the US dollar from raking in more gains today. The greenback extended higher as oil prices dropped below $125 a barrel and stock prices pushed higher. The Federal Reserve's Beige Book report, which could have been a big market mover for the foreign exchange market proved to be a nonevent as the contents remain virtually unchanged from the prior report. Economic activity continues to be sluggish while price pressures are elevated or increasing, but weak demand has made it difficult for producers or vendors to raise prices. There is no threat of a rate hike or a rate cut by the Federal Reserve in the near future and that has left the US dollar at the whims of the stock and commodity markets. Although airline stocks have been the biggest beneficiaries of the correction in oil, businesses and consumers alike should relish in the stimulative effects of lower oil prices. The housing bill is moving its way through the House of Representatives. The White House has dropped its threat to veto the bill, helping to restore investor confidence. In case things get worse for Fannie or Freddie, the Treasury needs the powers to bail them out before Congress goes on recess in September. Despite the arguments against a bailout, Fannie and Freddie are too big to fail and the consequences would be crushing. Jobless claims and existing home sales are due for release tomorrow and in all likelihood, they will only have a limited impact on the US dollar. Instead, the greenback will continue to rally as long as oil prices push lower and stock prices move higher. Also keep an eye on gold prices because once the move in gold and the US dollar start diverging, it may provide the first sign of a top in the dollar. Since last Tuesday, gold prices have fallen more than $70 or 7 percent. The simultaneous fall in the US dollar, rise in stock and gold prices confirm that the markets have grown less risk averse since the "twin twisters" of Fannie Mae and Freddie Mac first made landfall.

Euro Could Come Under Further Pressure on German IFO Report

Although dollar strength is the primary reason why the Euro is trading close to a 2 week low, it is starting to become very hard for Euro traders to escape the reality that the Eurozone economy is deteriorating.