NEWS / Foreign Exchange

Will Bernanke Save The Dollar From Further Losses?

The big dayis finally here, with dollar getting the worst of both Asian and Europeansession, with EUR/USD closer to 1.45 than ever before! Yesterday, we hadconsumer confidence, which printed again low number and therefore sparked a newwave of dollar selling all across the board.

            With EUR/USD near 1.45 and GBP/USDabove 2.0700 it will be interesting to see how the markets will react after theNew Yorkopen, as we have a big bulk of economic data starting with the ADP report. Thisreport will remind traders that whatever the outcome of today, there is stillhe risk of Non farm payrolls on Friday. After that, we have GDP out of the US,which again is forecasted bad and lastly Chicago PMI, the last news beforetonight??™s rate decision.

            As we have said before, there is alot of speculation regarding the outcome of today??™s decision by the FED, with acut of 25bps being the most likely one. Market analysts over the last fewweeks, go over the data again and again and have concluded that Bernanke andpals will have to end up cutting at least once again, in order to calm themarkets after the big turmoil. However, due to a record low dollar and risk offurther crushing in the equities, there is common belief amongst traders thatthe bank might indeed give a cut to the markets but the discount rate insteadof the fund rate. All those scenarios and speculations will be answeredtonight, with expected wild moves all across the board. The only version thatwill give dollar a temporary lift will be if FED leave rates unchanged.However, even if that happens, dollar bulls won??™t have the chance to celebratemuch, as markets will be disappointed if FED doesn??™t do anything and thereforecontinue to sell the dollar after the initial reaction. The whole thing is avicious circle as we see, as whatever Bernanke does, it will potentially havenegative effect in the markets.

            The other big move today incurrencies was in all yen related pairs, after Bank of Japan left the interestrates unchanged and President Fukui in his speech acknowledged the downsiderisks to the economy. These events lead to a massive sell off in the yen and wesaw all carry trades being bid like there was no tomorrow.

            The risk of further carry unwinds isalways there, as another crisis in American economy can spark liquidation inall yen related pairs.

            If all data point out to furtherworsening of the USeconomy, we might see further dollar weakness and therefore EUR/USD acceleratingto new highs ahead of the decision.

            Nevertheless, we must be aware ofthe aggressive dollar sell off which is happening these days in the name of apossible Fed cut, because in the past when moves like that happened before theactual news, the reaction was the opposite after the news. So, there is achance that the market will react in a ???buy the rumor sell the fact??? mode andthe move up in both EUR/USD and GBP/USD can be reversed slightly after theactual release.

            Whatever happens, everyone should bein front of their screens later on because one thing is for sure: trading willget volatile and exciting??¦