Friday 22nd August 2008
The dollar came off recent near term highs on the back of oil’s jump to a 2-week high. The higher oil price was prompted by a combination of heightened geopolitical uncertainty stemming from Russia’s decision to halt cooperation with NATO and warning that Saudi Arabia may scale back its recent increase in production.
The once resilient Euro zone economy is succumbing to the downward pressures of a strong Euro, a slowing global economy , high oil and food prices and tight credit conditions. According to 2007 GDP estimates, the IMF expects the world’s largest economy to grow at only 1.7% in 2008 and 1.2% in 2009 compared to 2.6% in 2007. The main reason the ECB is not cutting rates already is because inflation is well above a level consistent with price stability and the central bank wants to avoid second-round effects of energy prices in wage and price setting.
Will we see EURUSD back at 1.40? The Euro has been very weak over the past month and this trend is expected to continue. The Eurodollar has fallen from highs following a shift of interest rate expectations in favour of rate cuts by the ECB and rate hikes by the Fed. The market is predicting the Fed to increase rates by 75bp over the next eight FOMC meetings.
Today, Fed Chairman Ben Bernanke will be scrutinized for hints on future policy moves and any indications of support for Fannie Mae and Freddie Mac.
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