Tuesday, March 20, 2007


US$ Sells Off Ahead Of Fed

Reuters Reports on currencies. "The dollar fell against the yen Tuesday after a magazine reported that China would stop stockpiling foreign exchange reserves and slipped against other major currencies as investors remained wary of risky trades."

"But analysts said People's Bank of China Governor Zhou Xiaochuan might have been misquoted, since China's $1 trillion (U.S.) stash of reserves will keep growing as long as the central bank buys dollars to prevent the yuan from strengthening, a practice it has shown no sign of abandoning any time soon."

"The dollar was lower against most major currencies and emerging market currencies such as the Mexican peso. Sterling rallied broadly after inflation data boosted the case for higher UK interest rates, while the dollar fell 1.4 per cent against its Canadian counterpart to $1.1604 , a three-week low."

"'Effectively the dollar is losing ground against virtually all assets,' analysts at CitiFX Technical wrote in a note to clients on Tuesday. 'We think this could be the start of the weak dollar trade reasserting itself.'"

From Bloomberg. "The dollar may extend its drop versus the yen on bets the Federal Reserve will change its statement to reflect a deteriorating housing market. Some traders said the central bank may remove language from its statement saying housing has stabilized."

"'They may soften their statement a little when it comes to housing, and that could weaken the dollar,' says Camilla Sutton, a currency strategist in Toronto at Scotia Capital Inc."

"The dollar fell 0.2 percent to 117.25 yen yesterday in New York, and traded at 117.28 at 6:31 a.m. in Tokyo. It dropped 0.1 percent against the euro to $1.3317 yesterday."

"The British pound rallied against the dollar and the euro yesterday after U.K. consumer prices rose 2.8 percent from a year earlier, the second-fastest pace in a decade, adding to speculation the Bank of England will keep raising borrowing costs from 5.25 percent to stem inflation. 'The BOE may have to do a lot more to keep inflation under control,' said Paul Chertkow, head of global currency research in London at Bank of Tokyo Mitsubishi UFJ Ltd. 'This should cause the pound to appreciate.'"

"Mexico's currency climbed to the highest in more than three weeks against the dollar as gains in the nation's stocks sparked demand for the currency."

"The peso rose for a second day, and has regained most of the ground lost following the Feb. 27 rout that prompted selling of emerging-market bonds and currencies. 'Risk appetite has recovered significantly after the wash- out,' said Enrique Alvarez, an economist at IDEAglobal in New York. Investment 'flows have returned to the region.'"

"The yield on the 8 percent peso bond due in December 2015 fell 7 basis points, or 0.07 percentage point, to 7.75 percent, the lowest since Feb. 22, according to Santander Central Hispano SA. The price, which moves inversely to the yield, rose 0.41 centavo to 101.56 centavos."

"The premium, or spread, investors receive for holding a Mexican peso-denominated 10-year bond over a comparable-maturity U.S. Treasury widened 1 basis point to 3.24 percentage points."

From MarketWatch. "Gold futures scored a fourth consecutive winning session Tuesday to close near their highest level in three weeks, underpinned by softness in the dollar as traders awaited Wednesday's Federal Reserve decision on interest rates."

"Gold for April delivery gained $4.70 to close at $659 an ounce on the New York Mercantile Exchange, its highest closing level since March 1. It touched a high of $662 earlier in the session and the contract has now gained a total of $16.50, or 2.6%, from Wednesday's closing level."

"'For the moment, the wider range remains $635-$685 and volatility is on the rise. Caution is well-advised,' analyst Jon Nadler said."

"'The U.S. economy is about to slide into a recession,' Ned Schmidt, editor of the Value View Gold Reportt. 'This one may be more dangerous as it is a slide rather than a fall into recession due to high interest rates.' And the "U.S. dollar will likely accelerate its demise during this recession,' he said."

"'In the broader markets, gold is firm, but struggling to get above $655-$660, oil is weak at $56.65 and the yen is off its recent highs,' said William Adams, analyst at BaseMetals.com. 'Also with firmer stock markets, with the Dow Jones Industrial Average rallying 102 points yesterday and the Nikkei up 153 points overnight, the markets seem to be getting over the jitters of the last few weeks,' he said."

"Other metals prices also closed higher, with May silver leading the gains, up 1%, or 13.7 cents, to close near a three-week high of $13.37 an ounce. April platinum closed up 60 cents at $1,235.30 an ounce and June palladium gained $1.20 to end at $355.30 an ounce."

A recession looks more likely every day. It is hard to see anything good for the US currency in that scenario.

OTH, maybe deficits will 'matter' again.
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