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Dollar steady ahead of US housing data

Tuesday, January 8, 2008

LONDON (Thomson Financial) - The dollar was steady ahead of this afternoon's release of housing figures, with a weak reading likely to confirm expectations that the Federal Reserve will cut interest rates by half a point at the end of the month.

The pending home sales index for November is expected to drop to -0.5 pct from 0.6 pct in October, indicating that the US property market's woes are not over yet.

"Pending home sales should be a reminder that the housing slowdown has still not reached the bottom," said Niels From, currency analyst at Dresdner Kleinwort.

However he added that the dollar is unlikely to move significantly lower as investors are already expecting most upcoming US data to be on the weak side.

"The market is already pricing in a US recession scenario and consequently Fed expectations may no longer be moved by weak second-tier US data events," he added.

Markets will also be paying close attention to speeches by Federal Reserve members Charles Plosser and Eric Rosengrenn this afternoon, for their assessment of the economy's prospects.

Elsewhere the euro was steady, with a strong set of German manufacturing figures offsetting soft euro zone retail figures.

German manufacturing orders rose 3.4 pct in November after an October increase of 4.0 pct, boosted partly by a large number of big ticket items.

The November rise confounded market expectations for a 2.1 pct decline and meant that orders were up 13.6 pct year-on-year.

"The upside surprise was bullish for the euro prompting a temporary move higher in the currency against the dollar, suggesting that perhaps the credit crisis and strong euro is not having the negative effect on activity that some had feared," said Stuart Bennett, senior FX strategist at Calyon.

This meant the euro shrugged off earlier figures showing euro zone retail sales fell 0.5 pct in November from October, and were down 1.4 pct year-on-year.

Meanwhile the pound was off earlier highs, with a stronger than expected house price survey unable to lift the gloom surrounding the UK economy.

The UK's largest building society, Halifax, reported UK house prices rose 1.3 pct in December from the previous month, confounding expectations for a drop of 0.5 pct following three previous monthly declines.

Sterling had rallied on the numbers as it firmed expectations that the Bank of England will refrain from cutting interest rates this week.

But Geoffrey Yu, currency strategist at UBS, said while there may not be a cut this week, future ones are still on the cards and the pound remains vulnerable.

"We believe a sustained dovish monetary policy outlook, combined with stress in UK and global financial markets will keep sterling exposed to more weakness up ahead," he said.

Earlier this morning the British Retail Consortium reported that UK retailers had their worst Christmas for three years, with December like-for-like sales up 0.3 pct year-on-year, well down on the previous month's 1.2 pct.

Finally the yen was weaker this morning, due to stronger equity markets. This tends to weigh on the yen as it reduces risk aversion, meaning investors move away from safe-haven currencies.

However the expected slowdown in the US economy over the coming year means the yen is expected to firm over 2008 as a whole.

"International macro themes are playing well to yen strength, with a slowing US economy occurring in the context of ongoing inflationary pressures in the global economy," said Ashley Davies, currency strategist at UBS.

"In addition Japan's lethargic economic outlook is at least very stable in contrast to the heightened uncertainty over the outlook for the US and European economies," he added.

London 1230 GMT London 0925 GMT

US dollar

yen 109.48 down from 109.58

sfr 1.1146 down from 1.1166


usd 1.4725 up from 1.4707

yen 161.18 up from 161.16

sfr 1.6413 down from 1.6425

stg 0.7448 up from 0.7425


usd 1.9766 down from 1.9802

yen 216.40 down from 216.93

sfr 2.2022 down from 2.2112

Australian dollar

usd 0.8799 up from 0.8782

stg 0.4448 up from 0.4435

yen 96.31 up from 96.19

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January 9, 2008 at 1:03 AM  

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