Waiting for U.S. Interest Rate Cuts - Dollar Continues to Plunge

The Dollar has depreciated against the EUR for the 7th day in a row. Fueling these drops are delays in the U.S. auto industry bailout, negative economic sentiment, and forecasted U.S. Interest Rate Cuts. All eyes will be on the Fed's decision to cut rates by the forecasted 0.50% today. Any deviation from the expected rate cut could produce large price swings in the value of the USD.

Summary

USD - Dollar Drops on Uncertainty over U.S Automakers Bailout Plan

EUR - Euro Rises on Weaker Greenback

JPY - JPY Rallies on Weak U.S Economic Data 

Economic News 

USD

The Dollar responded negatively to concerns about further weakness in the U.S. economy and today's Federal Reserve policy meeting. The currency has hit a two-month low against a basket of major currencies, with the greenback falling to $1.3727 against the EUR, the weakest level since October 14. It has also dropped against the JPY to the level of 90.50 Yen, after hitting a 13-year high of 88.10 on Friday. The Dollar also extended its drop versus the GBP after the U.S. Treasury reported yesterday that international demand for long-term U.S. financial assets weakened in October as foreign investors began to dump risky positions and are no longer interested in investing in the U.S. currency.

The USD has depreciated an uncertainty that surrounds the fate of the government's bailout plan for U.S automakers, and the bailout's possible economic impact. After the U.S. Senate on Thursday rejected a bailout plan to avert a possible bankruptcy by one or more of the nation's three automakers, the U.S officials said on Friday that the government was considering tapping a $700 billion financial industry bailout fund to prevent a collapse of ailing U.S. automakers. As a result, the market is reacting by weakening the USD further, since investors fear that a failure of any of the automakers would produce a year long recession and may drag other companies under as well.

Meanwhile investors await the outcome of the policy meeting by the Federal Reserve on Tuesday to see how close to zero the U.S. central bank will cut its Interest Rates. The Fed is widely expected to cut rates by 50 basis points or more from its 1% benchmark. With Interest Rates rapidly approaching zero, the Fed may also indicate more steps to provide liquidity into the market in order to support the U.S economy through a recession. But whatever the Fed comes up with, it's not likely to spark a sudden turn round in the U.S. economy, and therefore it's quite difficult to expect a sudden recovery in the Dollar.

EUR

The European currency has climbed to a new two-month high as investors continued to exit long Dollar positions amid uncertainty over the fate of U.S. automakers. The EUR surged above $1.37 as markets awaited the outcome of a Fed policy meeting today, when it is widely expected to cut its Interest Rate by at least 50 basis points from a previous 1%, a move that might further erode the greenback's yield appeal.

The EUR also rallied after the European Central Bank's (ECB) report on Monday showed that risks to Euro-Zone financial stability have eased from the peak of the financial crisis in October. In a twice yearly report on risks to the financial system, the ECB gave an extensive list of potential problem areas ranging from broad economic worries to market-specific issues. Despite the fact that the risks still remaining are rather high, the European Central Bank Vice President Lucas Papademos said that things had improved since the peak of the crisis after the collapse of Lehman Brothers. The rapid deterioration in the U.S. economy, coupled with the adverse effects of monetary and fiscal stimulus, apparently didn't predict well for the Dollar.

While performing relatively well against the USD, the European currency had declined against the British pound, which has strengthened to 89.50 pence after weakening 3.2% against the EUR last week. The GBP has climbed to $1.5336 against the Dollar from $1.4944 three days ago. The Bank of England cut its main Interest Rate to 2% on December 4, from 5.5% at the start of the year, as policy makers sought to limit the fallout from the global financial crisis, and the European Central Bank has pared its benchmark to 2.50% the same day. Nevertheless according to several analysts, the EUR and the GBP rally against the U.S currency looks a bit overdone, and the market should expect a possible correction in the next few days.

JPY

The Yen has jumped to a 13-year high against the Dollar to 90.50 while advancing against a basket of its major currencies on speculation the global recession will prompt investors to unwind carry trades. Japan's 0.3% target lending rate is the lowest among major economies. Economists predict that the JPY may accelerate its gains even further should Japanese investors start repatriating some of their massive overseas investments and the country's exporters throw in the towel and buy.

However the rapid advancement of the Yen has raised a concern among investors that the Japanese government may intervene in the currency market for the first time in five years in order to slow the JPY advance against the Dollar and other currencies. Japan last intervened on its own when it sold a record 20.4 trillion Yen ($224 billion) in 2003 and 14.8 trillion Yen in the first quarter of 2004, when the Yen rose as high as 103.42 per Dollar. Nevertheless some analysts are of the opinion that while government intervention is possible, any unilateral action wouldn't be enough to stop the Yen appreciating further against the greenback. Right now the market's focus is on the state of the U.S. economy and its monetary policy. This may may cause the JPY to advance to as much as 85 per Dollar. 

Technical News 

EUR/USD

The bullish trend is loosing its steam and the pair is consolidating around the 1.37 level. The 4 hour chart's RSI is already floating in an overbought territory suggesting that a recent upwards trend is loosing steam and a bearish correction is impending. Going short with tight stops appears to be preferable strategy.

GBP/USD

The pair is testing the very important key resistance level of 1.5300. However, the Daily chart's Slow Stochastic is providing mixed signals. All oscillators on the 4 hour chart do not show a clear direction as well. Waiting for a clearer sign on the hourlies might be a good strategy today.

USD/JPY

The 4 hour chart is showing mixed signals with its Slow Stochastic fluctuating at the neutral territory. However, the Daily Chart's RSI is already floating in the oversold territory indicating that a bullish correction might take place in the nearest future. Going long with tight stops appears to be preferable strategy.

USD/CHF

There was a violent breach of the Bollinger Bands' lower border on yesterday's daily chart, indicating a bullish correction may take place in the near future. In support of this, the pair also floats in the oversold zone on the 4 hour chart's RSI. Once the reversal takes place, going long with tight stops might be a prefferable strategy.