Wednesday, January 03, 2007

Forex News: USD Weighed following ADP

The US economy remains the primary focus among currency traders at the start of the New Year with the data calendar beginning in earnest on Wednesday. With US stock and bond markets closed on Tuesday in observance for a National Day of Mourning, the release of manufacturing ISM was postponed until today. The December report is expected to reveal an improvement in manufacturing activity back to the key 50-level -- which distinguishes between expansion and contraction, from last month, which contracted to 49.5. Meanwhile, construction spending for November is forecasted to improve slightly from the prior month’s 1.0% decline, slipping by 0.5%.

The dollar’s direction will largely continue to be dictated by sentiment over the direction of global interest rate differentials – which ultimately hinge on Fed policy and the US economy. Dollar bears anticipate the Fed will ease policy in Q1 as a result of further deterioration in both housing and manufacturing to the extent of spillover into other sectors of the economy. On the other side of that coin, if incoming economic data reveals a bottoming in the housing market, steady pickup in manufacturing and continued improving conditions in the labor market, a Fed rate cut would be delayed until the second half of the year – thereby providing support for the greenback.


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