The Dollar fell broadly on Friday after the Federal Reserve slashed its discount rate on loans to banks and said US economic growth could slow in light of tightening credit markets. The dollar started to pull back from a seven-week high against a basket of major currencies on Thursday after investors sought safe-haven bids in low-interest currencies and US Treasuries in the midst of a global equities weakness.
The Fed’s action, cutting the interest rate charged on direct Fed loans to banks by a half-percentage point to 5.75%, followed a month-long slide of more than 1,100 points on the Dow Jones industrial average and eased credit shortage fears in the equities market.
It globally slowed the unwind of carry trades from its torrid pace on Thursday, but market strategists said high-yielding currencies, particularly in emerging markets, are still at risk. Despite the stock market’s rapid rise on Friday, which boosted the S&P 500 almost 2.5 percent, some analysts anticipated more rocky trading days ahead.
News and Events:
The Dollar fell broadly on Friday after the Federal Reserve slashed its discount rate on loans to banks and said US economic growth could slow in light of tightening credit markets. The dollar started to pull back from a seven-week high against a basket of major currencies on Thursday after investors sought safe-haven bids in low-interest currencies and US Treasuries in the midst of a global equities weakness.
The Fed’s action, cutting the interest rate charged on direct Fed loans to banks by a half-percentage point to 5.75%, followed a month-long slide of more than 1,100 points on the Dow Jones industrial average and eased credit shortage fears in the equities market. But the Dollar fell as many players speculated on the chances for an interest rate cut by the central bank, which would reduce the dollar’s yield advantage against other currencies. Analysts said "The immediate impact was on equities, and foreign exchanges followed the equities market, moving the Euro and Australian dollar up against the Dollar."
Friday, EurUsd was up 0.34% at 1.3476 after having hit 1.3547 high and 1.3370 low in the early Morning. Against the Yen, the Dollar was 0.55% higher at 114.34 after having hit intraday 111.60 low, while the Euro climbed 0.9% to 154.09, bouncing back from 149.26 intraday low. The Dollar hit its biggest weekly decline since early March against the Yen as risk-averse traders vigorously unwound carry trades, in which investors borrow cheaply in low-yielding currencies like the yen to buy higher-yielding assets.
These trading shifts pummeled high-yielding currencies like the New Zealand Dollar, which slid 9.73% against the Yen, and the Australian Dollar, which fell 8.78% against the yen in the largest weekly decline since October 1998. The Reserve Bank of Australia intervened overnight Friday for the first time since 2001 to restore liquidity for the Australian dollar.
The Euro was off by almost 5% last week against the Yen, the biggest weekly loss in four years. Sterling was hit hard hit last week, falling almost 2.09% to 1.9815, the largest weekly decline in almost a year, after long holding favorite-status with dealers for its relatively high interest rate.
The Fed’s action slowed the unwind of carry trades from its torrid pace on Thursday, but market strategists said high-yielding currencies, particularly in emerging markets, are still at risk.
Despite the stock market’s rapid rise on Friday, which boosted the S&P 500 almost 2.5 percent, some analysts anticipated more rocky trading days ahead. But Analysts said “The Fed has perhaps gained some leeway from the ECB, which has stepped into the breach forcefully, picking up where Greenspan left off. But as the risk of a US recession increases … the Fed will likely oblige. This might reduce US home bias and reverse the most recent Dollar strengthening. But it is unlikely to bring back the carry trade in full force.”
Today’s Key Issues (time in GMT):
08.30 UK July Public Finances PSNB �-6.10B vs �7.44B
08.30 UK July Public Finances PSNCR �-11B vs �10.34B
12.30 US July National Activity Index previously 0.11
12.30 US July Lead Indicators 0.4% vs -0.3%
The Risk Today:
EurUsd reversed part of last week losses from 1.3361 Thursday low to 1.3476 on Friday. This low marks minor support before 1.3309 Trendline support. Renewed weakness may open the door toward 1.3263 June low. Initial resistance holds 1.3550 pivot point and former support. Strength over this may focus again on 1.3750 resistances and pivot point. Strong support is located at 1.3309 1-year up Trendline.
GbpUsd extended downtrend into a fifth session on Friday down to 1.9653 low before closing to 1.9815. Market found support on 1.9808 (23.6% retracement of 1.7051 � 2.0660 2 years advance). A break there will open the way down to 1.9623 support from end of July and, on a longer term view, 1.9281 (38.2% retracement). Initial minor resistance holds 1.9960 Wednesday high. The possible rebound still looks limited to 2.0000 pivot point and former support.
UsdJpy last week sharp drop hits 111.60 low. Pressure remains strong and further weakness may open the door toward 110.3 support (retracement of 101.68 � 124.26 advance). Minor resistance holds 116.74 Thursday high before strong resistance 119.50 end of July high.
UsdChf yesterday reverse from latest days recovery from early August 1.1819 low to 1.2183 area (38.2% retracement of 1.2771 � 1.1819 decline). After Friday weakness, -0.78%, market may consolidate around 1.2044 (23.6% retracement). Market traded down to 1.1819, two weeks ago, new key support. Former resistance 1.2044 marks initial support.
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Resistance and Support:
By Jean-Claude Braha - ACM Advanced Currency Markets, Geneva, Switzerland