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 Dollar Falls on Discount Rate Cut

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Number of posts : 440
Registration date : 2007-07-01

PostSubject: Dollar Falls on Discount Rate Cut   Sat Aug 18, 2007 11:37 pm

Daily Forex Strategy Briefing

Dollar Falls on Discount Rate Cut

Sat, Aug 18 2007, 07:05 GMT
by Hans NilssonCMS Forex

  • The
    yen pared overnight gains after the Federal Reserve on Friday cut the
    discount rate on loans to banks by 0.5 percentage point, to 5.75% and
    acknowledged downside risk to the US economy from the global credit
    crunch. Meanwhile, the dollar fell against the euro, sterling and
    dollar block currencies on the partial easing move from the Fed.

  • The
    EUR/JPY fell to the lowest level since October on massive unwinding of
    yen carry trades sparked by the global credit crunch. The chart below
    shows the pair has been unwound in a very short period. There is
    support at 150 and resistance at 156, but the market is volatile so the
    pair can move dramatically again.

  • The
    dollar index unsuccessfully tested the resistance from the bear-trend.
    Today’s Fed move “to promote the restoration of orderly conditions in
    financial markets” eased safe-haven flows into the dollar. However, the
    credit crunch is not over yet. A break of the resistance will have a
    positive effect on the dollar.

Financial and Economic News and Comments

US & Canada

  • The
    Federal Reserve cut the discount rate, the interest rate the Fed
    charges to banks, by 0.5 percentage point, to 5.75%, acknowledging a
    policy shift is required to contain the subprime-mortgage trouble. The
    Fed did not change its target for the federal funds rate, still at
    5.25% for more than a year. However, the Fed is likely to cut the fed
    funds rate at its next meeting in September. The discount-rate cut will
    assist in lending to institutions in need of financing as the Fed will
    accept a broad range of collateral including home mortgages. Today’s
    Fed action also includes an extension in the discount window borrowing,
    allowing 30-day financing that is renewable, instead of a standard
    overnight loan.

  • US consumer confidence
    fell more than expected to 83.3 in August, the lowest reading since
    August 2006, from 90.4 in July, as falling stocks and widening credit
    crunch added to worries about weakness in the US housing market, the
    Reuters/University of Michigan preliminary sentiment index showed.

  • German
    producer prices unexpectedly fell 0.1% m/m and slowed to a 1.1% y/y
    rate in July, the lowest reading since April 2004, the Federal
    Statistics Office said. Inflation in the EMU appears benign and the ECB
    is unlikely to raise interest rates as long as the present credit
    problems persist.

  • The
    Reserve Bank of Australia intervened in the FX market for the first
    time in 6 years, since the Australian’s dollar was allowed to trade
    freely in 1983, to stem the Aussie’s steepest decline. The global
    credit crunch has made financial markets “extremely skittish,” RBA
    Governor Glenn Stevens said. “Where market conditions are disorderly,
    we are prepared to intervene from time to time,” he said.

  • Japan’s
    top financial diplomat, Naoyuki Shinohara, reiterated the Ministry of
    Finance’s standard line on currencies, saying he was watching the
    market carefully but would not comment on specific levels. It is
    unlikely the Bank of Japan will raise interest rates at its meeting
    next week.

  • Japan’s leading economic indicators index fell more than expected in July to 72.7.
FX Strategy Update

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