Euro Ends Day Down Nearly 300 Points From Intraday High

The euro collapsed 300 points from the intraday high during the European and US trading sessions to end the day near 1.4150 as investors bought up risky assets and signaled confidence in US assets.

There was no European data on hand, but there was central bank commentary on hand that would normally provide a bullish spark for the euro. Indeed, European Central Bank Executive Board member Juergen Stark noted the materialization of “second-round” inflation effects from energy and food prices, saying that wages were rising at “annual rates not seen since the mid-1990s.” The ECB has frequently cited a need to maintain price stability so as to avoid these “second-round effects,” and as a result, it is clear that the central bank will not even consider cutting rates anytime soon. [B]While Credit Suisse overnight index swaps may be pricing in over 25bps worth of cuts within the next 12 months, I do not expect the ECB to do so until Q4 2008 or early 2009.[/B] Furthermore, like the British pound, the euro remains extremely oversold and there are indications that EUR/USD could advance.

The US government’s seizure of Fannie Mae and Freddie Mac has provided a boost to the US dollar and carry trades on Monday, and has received applause around the world from Federal Reserve Chairman Ben Bernanke to European Central Bank President Jean-Claude Trichet, who called the move a “welcome decision.” Indeed, many have taken the intervention as the answer for the ailing US housing sector and financial markets. [B]While the operation of Fannie Mae and Freddie Mac is good for the trading of mortgage-backed securities, in that there will be a party willing to buy the risky assets, it does not mean the values of them will improve. In order for these values to rise, US property values will need to increase first and there is no single solution for this.[/B] In reality, another major factor working against a recovery in housing is the slowing in the broad US economy, especially given last week’s worse-than-expected labor market reports. US non-farm payrolls (NFPs) fell 84,000, marking the eighth consecutive month of job losses in August, while the unemployment rate picked up to a 5-year high of 6.1 percent. Nevertheless, Credit Swiss overnight index swaps (OIS) are still pricing in over 50bps worth of hikes by the Federal Reserve within the next 12 months as the Federal Open Market Committee said during their last meeting that “the next policy move would likely be a tightening,” though they did specify that any changes would "depend on evolving economic and financial developments.” [B]Overall, I think this US dollar rally stemming from the Fannie/Freddie news is one to be leery of, and given the vastly overbought nature of the currency, we may be nearing a point where risk/reward warrants selling the greenback.

[/B][B] Check out Daily Fundamentalsin its entirety for analysis and outlooks on the US dollar, euro, British pound, Japanese yen, and the commodity dollars.[/B]