Monday, November 27, 2006

Forex News: FX Extends Move, Awaits Normal Liquidity

Forex News

Traders extended the dollar’s plunge in the early Monday Asian session, pushing past fresh 20-month lows versus the euro near 1.3180 and 23-month lows against the sterling at 1.9467. Although we have remained bearish on the dollar throughout the second half of 2006 on the premises of narrowing global interest rate differentials and deteriorating US economic fundamentals, we deem this latest sell-off in the greenback to be too much too soon, exaggerated only by holiday-thinned market conditions.

We continue to anticipate dollar weakness over the coming months with an inevitable shift in the Fed’s monetary policy to an easing stance as early as Q1 2007, but would remain wary of selling into this latest slump on the chance for a retracement once trading conditions normalize. Additionally, we would exercise caution in chasing the move as the end of the calendar year looms with the spike in volatility possibly proving short-lived.

Nevertheless, of primary concern to currency traders and investors alike is the trajectory of the US economy and whether the Federal Reserve can successfully engineer a soft landing. Of utmost importance will be forthcoming economic figures on growth and inflation to accurately assess the duration for the Fed’s bias against inflationary pressure and clues as to when a shift to an easing stance may materialize.


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