NEWS / Foreign Exchange

No signs of improvement for USD

The EUR/USD pair dipped sharply in the morning to the 1.42 zone, also as the EMU composite PM disappointed, but the dollar once more couldn??™t hold on to these gains and had to give them back gradually throughout the day. It was not a unidirectional move, with ups and down in this pair throughout the day, but in the end the EUR/USD pair was back at the 1.4260 zone, making it an almost unchanged day.

We feel the recent attempts of the dollar have been blocked off fats and we see this as a confirmation that the buy-euro-on-dip scenario remains in place. We would also call it a sell-USD-into-strength atmosphere as this seems to describe the more general dollar situation, judging by USD/JPY for instance (see also below for this pair).

The dollar confidence should remain shaky with the fall-out at Merrill Lynch being very serious. The write-downs are beyond what one could have imagined a few weeks ago. This raises credibility issues. The mass lay-offs at Banc of America also suggest deep problems in the US financial sector and no quick fix is expected.

Also, the market is now even worried about an intra-meeting Fed rate cut. This is also putting the screws on the dollar.

Yesterday also the US existing home sales disappointed. Sales dropped by 8% M/M to an annual rate of 5.04 million, following a 4.7% M/M decline in August, the lowest since January 1999. This clearly suggests that the downtrend is accelerating??¦

All things combined we see no reason to suddenly turn more positive on the dollar.

Today, the attention should go to the durable goods orders and especially the new home sales.

The yen gained some ground yesterday in all the turmoil on the financial markets (and maybe also somewhat on the news of rocket attacks of Turkey in Northern Iraq). USD/JPY dipped from the 114.70 zone to the 114 area.

All the troubles in the US financial sector can only be of help to the yen of course. The Merrill Lynch and Banc of America stories, the existing home sales highlight the difficulties coming from the US housing sector. This creates the fear that the US consumer at some stage will respond by consuming less, thus taking away the growth engine of the US economy. This potential prospect is giving risk aversion and this helps underpin the yen.

This morning, USD/JPY is rather stable at the 114 area. Japanese corporate service prices rise an above forecast 1.4% Y/Y, with also the prior rise upwardly revised from 1.0% Y/Y to 1.1% Y/Y. This can encourage BoJ hawks.

USD/JPY has been moving in a broad sideways range between 117.95 and 111.60. We would advise to play those ranges, with currently a bias to the downside.

The marked deterioration of the manufacturing PMI in the euro zone (which continued its downtrend and fell from 53.2 in September to 51.5 in October, the lowest level since August 2005) provided an intra-day dip towards the day lows at the EUR/GBP 0.6940 zone, but the sterling couldn??™t hold on.

The pair ticked up, following the foot steps of EUR/USD for much of the day, ending at the 0.6955 zone. The financial market turmoil almost immediately triggered thoughts that the UK financial sector should brace for new troubles.

This is confirmed in an FT article this morning on this very subject, saying that the UK system is at risk for new shocks. This morning the euro gained some more, probably just on account of that article, reaching the 0.6970 zone.

Today, the German IFO should take center stage in the EUR/GBP pair.

In other markets, the NZD was broadly unchanged after the RBNZ decided to keep rates unchanged overnight at 8.25%.