NEWS / Foreign Exchange

More Dollar Damage on Growth Arguments for Fed Easing

The dollar drops across the board as the case for further Fed easing becomes more of a macroeconomic argument and not just owing to market volatility. More below.

Weekly jobless claims fell 8k to 331k, taking back the sharp 38K increase in the prior week, which was a result of President Day Holiday. September durable goods orders fell 1.7% versus expectations of a 1.5% rebound, following a revised 5.3% decline (previous -4.9%). Orders excluding transport items edged up 0.3% reflecting 132 Boeing orders, while orders excluding defense items rose 0.7%.

The 10 am release of US new home sales is expected to show a 0.3% decline to a 10-year low of 770K in September from 795K, with the months supply seen up to 8.8 months from 8.2 months. Wednesday??™s release of new existing home sales showed a bigger than expected 8% slump, while the number of month??™s supply hit a 25 year high above 10 months.

The negative foundation for the US dollar is being increasingly highlighted by the following two developments:

1. As the deterioration of US housing deepens, the negative filtering effect is expected to reach to housing related jobs and exasperate homeowner??™s equity, thereby impacting consumer spending. Consequently, this will trigger the economic argument for further Fed easing, beyond simply market turbulence and dried up liquidity. We had warned throughout after August 15, that renewed dollar declines would take place once the macroeconomic reasoning for further rate is added to the ???market volatility??? argument for Fed cuts.

2. The only catalysts for dollar gains over the past 2 weeks have been unwinding of carry trades, as portfolio managers unload some of their dollar shorts to meet losses in equities. In other words, the only developments causing the dollar to rise have been renewed equity declines, rather than an improvement in US fundamentals.

In addition to further earning disappointments, equity markets may face further losses as hopes gradually turn into expectations for a a more aggressive 50-bp rate cut in the fed funds rate. We expect the Fed to cut the fed funds by 25-bps and the discount rate by another 50 bps.

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