NEWS / Foreign Exchange

Gloomy Outlook For The Dollar

With theEUR/USD printing new yearly highs of 1.3410 before consolidating back to the1.33 level, another gloomy week for the dollar bulls ended.  Despite this, it was certainly a week full oftrading action, with events like the FOMC rate decision and a variety ofHousing related data being released.

As wementioned last week, the main thing that was weighing on the dollar these dayswas the sub prime problems, which was making investors think twice beforebuying it. As the sentiment became quickly dollar negative, any bad news out ofthe USwas welcomed with a hard sell off in dollar related pairs. The first piece ofnews was relatively dollar bearish, with the NAHB Housing Market Index printinglower figure than expected, and the market set the tone for dollar sales which continuedthrough the week.

As expected,the Fed decided to leave rates unchanged once again, leaving the market staringin its crystal ball as it tried to predict their future plans.  We believe that the Fed??™s statement was not asbad as market perceived it as although it was on the bearish side, the phrase ???additionalfirming may be needed??™ was nowhere to be seen. As normal though, the Fed wasvague and the market struggled to interpret their actions and predict furthermoves.

Sometimes thiscan be frustrating and Wednesday saw traders sell off the dollar by almost 100points after the statement and stocks rallied for the first time in days. Thisindicated that market is trying hard to see clearly, but when uncertaintycreeps in the dollar is immediately sold. These moves don??™t last long though,and sure enough, the Euro rejected the 1.34 level very fast.  The EUR/USD fell to the 1.33 level, butFriday??™s better than expected Housing data led it to break 1.33 and close theweek at 1.3285.

But is themarket now ready to buy the dollar and forget the so-called slowing of theeconomy?  Perhaps Friday??™s better-than-expectedExisting Home Sales figures will be enough for the market to forget the Housingproblems that weigh in the economy? Closely observe this week??™s Housing data toassess any impact this news may have had.

Today sawthe New Home Sales print a very disappointing seven-year-low figure, taking theEUR/USD up to 1.3345. This bad news was welcomed with a great sell-off in alldollar related pairs, causing great concern among market traders that a crisisin the economy may not be too far away.

Later inthe week we have Consumer Confidence and Durable Orders to look forward too,plus the Chicago Purchasing Manager which we think will determine the dollar??™sdirection; perhaps even forcing the EUR/USD to new yearly highs of 1.35 if thenews is bad.  Furthermore, we have somenews from the Eurozone and Germany??™sIFO, which will need to be watched in order to see how the European economy performs.

Bernanke willbe testifying in front of the Joint Economic Committee, which will beinteresting, especially if he downplays the problems in the Housing Sector orif he admit to any problems.  Expect secondthoughts concerning rate hikes if he does. Most analysts believe that the next move by the Fed will be a rate cut,however as their policy always is so hard to read, we might end up being nonethe wiser.

One thingis for sure, all these bad indicators are making the market very nervous aboutthe state of the economy and while there is not much data coming out this week,expect this feeling to continue, and the EUR/USD to stay in a tight range,until an event triggers an upward rather than downward move.