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Dollar steady after recovering overnight

Monday, January 7, 2008

LONDON (Thomson Financial) - The dollar was steady against major currencies after recovering from Friday's sharp losses, though worries over the outlook for the US economy continue to cloud the outlook for the currency.

The dollar tumbled last last week, hitting a five-week low against the euro on news that US economy only created 18,000 jobs in December -- a four-year low. The dismal figure has raised expectations that the US Federal Reserve will lower rates again when it meets at the end of the month.

"The dollar managed to stabilise overnight," said Geoffrey Yu at UBS.

"Equity markets across the globe have stopped their recent slide but concerns over US growth and its broader impact on the global economy continues to undermine sentiment," he said.

Friday's payrolls report has "all but confirmed" that the Federal Reserve will need to focus on recession prevention ahead of inflation risks and markets are now "heavily favouring steeper (interest rate) cuts over the next two quarters".

For the euro meanwhile, there was some relief that the euro zone economic sentiment indicator dipped only slightly to 104.7 in December from 104.8 in November, well above forecasts for a more substantial decline to 104.0.

"December's very small fall in the European Commission's euro-zone economic sentiment indicator provides some hope that activity in the region is slowing only moderately," said Jennifer McKeown at Capital Economics.

Along with slightly above-consensus PPI figures, this will keep intact expectations that the European Central Bank is unlikely any time soon to follow other central banks and cut interest rates.

"Today's data provide further reason for the ECB to remain in hawkish

mode at this week's meeting (on Thursday), and probably for some months after that," McKeown said.

Elsewhere, the pound remained weak after earlier hitting a four-and-a-half-month low against the dollar of 1.9652 usd as investors turn their attention to Thursday's interest rate decision by the Bank of England.

The verdict is expected to be a close call, with a small but growing number of analysts predicting a back-to-back quarter point rate cut to 5.25 pct to follow on directly from December's cut.

"There's certainly no clear consensus emerging as to whether we'll see another quarter point come off UK rates with many saying the decision will go down to the wire, so expect to see some volatility either way on Thursday," said James Hughes, market analyst at CMC Markets.

Ahead of that, tomorrow's snapshot of the retail sector from the British Retail Consortium will come into focus as it will show spending patterns in the crucial year end sales season. A weak figure will shorten the odds of a UK rate cut Thursday and weigh on the pound.

Posted by MOHAMED SAID at 7:05 AM  

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