Dollar Strengthens at Start of Holiday Week - Worst Over For US Housing?

[B]Talking Points[/B]

• Japanese Yen: Corporate demand comes in at 110
• Pound: Still weak as Rightmove weighs
• Euro: Slips on EURJPY sales but bids ahead of 1.4600 hold
• US Dollar: Housing data on tap

Currency markets traded in a relatively tight range at the start of holiday-shortened week, driven mainly by equity flows as the economic calendar remained barren providing little fresh news flow for FX traders. EURUSD made a half hearted attempt to run for the 1.4700 figure at the start of Asia trade, but the third consecutive daily decline in the Nikkei pulled the unit down towards the 1.4600 barrier. Still, bids quickly reappeared at that level suggesting that demand for the euro remains quite strong.

Despite, the news over the weekend that GCC nations may be considering the idea of abandoning the dollar peg, the greenback saw no further sales on diversification fears. Oil producing nations find themselves in a difficult position now as they continue to earn revenue in dollars, but import a significant portion of their goods from the Euro-zone, creating very strong inflationary pressures within their economies.

Should these countries decide to move away from the present dollar peg to a more balanced basket of currencies, the downward pressure on the greenback is very likely to continue. Oil producers constitute one of the largest buyers of US financial assets and if they begin to reduce their investment allocation into US treasuries and bonds the structural pressures caused by the massive US Current Account deficits would only be further aggravated. Friday’s weak TICS results, which printed at $26 Billion versus $75 Billion projected, only served to exacerbate those fears, but for now the situation remains at a standstill, as markets warily watch the events in the Middle East. The commentary from the GCC monetary authorities while reflecting genuine economic problems, may remain nothing more then rhetoric as the political pressures in those nations may prevent any substantive alteration of the policy. However, if oil producers do decide to make some concrete changes away from pegging to the dollar, speculative sentiment could easily push the EURUSD to 1.50 on the news.

Turning our attention to more micro–economic concerns, US calendar is very quiet this week, but nevertheless is full of housing data. Today the market will see the NAHB Housing Index and tomorrow we have housing starts and permits. While losing some of its punch, housing news continues to have an important impact on the market, but should the data suggest that the fall out in the sector may have reached some kind of bottom the greenback could see a mild bounce. After all, the current consensus view is that the Fed will be forced to lower rates in December due to continued deterioration of residential real estate. If that’s not the case the slide in the dollar could come to a halt this week.