al yaqen's currency outlook

Forex: Fed Cuts…and the U.S. Dollar Gains?!
Elliott Wave International discusses the importance of price action, rather than the news, to the trend in the U.S. dollar.

Question: When the U.S. Federal Reserve Bank lowers interest rates, what is the U.S. dollar supposed to do, according to the conventional economic wisdom?

That’s right, fall – because “everybody knows” that lower U.S. interest rates make dollar-denominated assets less attractive to foreign investors. That's one of the main reasons, said many analysts, why the dollar has been weakening ever since the Fed went on its latest rate-cutting streak.

So why then did the dollar gain today (March 18) after the Fed cut the rates by a hefty 0.75%? Against the euro, the USD gained almost 200 pips (or two full cents) in less than two hours Tuesday afternoon. (The dollar gained another 200 pips by mid-day on Thursday, Mar. 20 -- Ed.)

Is it because the Fed “is perhaps getting a handle on the U.S. economic problems”? (The Wall Street Journal) Sure, perhaps. But had the dollar fallen after the cut instead, you know exactly what the same analysts would be saying.

Tuesday’s “illogical” reaction by the dollar brings to mind a Market Insight comment that Elliott Wave International's Senior Currency Strategist, Jim Martens, posted for subscribers of his Currency Specialty Service two days ago, on March 17. Here’s an excerpt:

Market Insight, 3/17/2008 – Plenty of news these days. Certainly, this is the type of environment we've been looking for. Having cut rates significantly, the Fed is running out of bullets. But the Fed may not be done yet. …the expectation going into the week was that they would cut, the only argument was by how much.

For us [though] it's a matter of what we can expect from their action, not what they might do.

That's a much easier question to answer. It appears, at least to me, that a new dollar low will bring at least the decline that started last week to an end. If that new low has not been registered before the meeting Tuesday afternoon, look for the dollar to initially fall on the announcement. We'll be looking for a bottom afterwards, and a rally attempt. If, just before the announcement, the dollar is already at new lows, then we will expect the reaction to the announcement to be dollar buying.

These ideas of how the market should react to the news are based on the price patterns, and not on what the announcement will be. This is the same approach we use prior to all announcements. The news simply offers the trading environment that allows for a quick move.

Some see such an environment as a dangerous time, and that can be true. But if the [Elliott] wave pattern is clear, we can often take advantage of the reaction to the news without having to think as hard as our peers that agonize over every [economic] number. Our approach is much more direct. It doesn't ask what should happen – but is based on what actually happens. ...JJM...

Now that the Fed has used up three more of its “bullets,” many currency traders will be wondering – how will this affect the dollar? That’s a wrong question to ask. “All that matters is price. We might as well let price tell us what to do,” says Jim to his subscribers.

You can have Jim Martens' latest forex forecasts on your screen in seconds – just scroll below to learn how.

New:Fundamental News on EU. Let's read what other Expert says.

Is the Euro Rally Over?

Thursday, 20 March 2008 21:48:45 GMT

Written by Kathy Lien,FXCM Chief Strategist
• Why the Dollar Could Resume Its Slide
• British Pound Soars on Surprisingly Strong Retail Sales Report
Is the Euro Rally Over?
The Euro plunged over 250 pips today, leaving many traders wondering whether the currency’s rally has officially come to an end. According to our Technical Analyst Jamie Saettele, the dollar rally could continue for months. Our FXCM Speculative Sentiment Index is also growing less short, which suggests that the currency’s rally could be losing steam. Fundamentals are beginning to turn in favor of the dollar with the Philadelphia Fed manufacturing index rebounding in the

month of March and Eurozone PMI numbers falling short of expectations. However is the Euro’s rally really over? That depends upon what time frame you are looking at. For the next 24 hours the dollar could continue to weaken, but from a fundamental perspective, the dollar should resume its slide in the coming weeks. The market is simply relieved that the recent measures by the Federal Reserve are restoring some stability across the financial markets. Yet, inflation is still a big problem for the Eurozone with German producer prices rising much stronger than expected last month. In fact, the German economy is still holding up well with activity in the German manufacturing and service sectors continuing to accelerate. Earlier this week BMW said that they are doing quite well despite a strong currency, higher raw material costs and weaker US growth. This goes to show that the Eurozone economy has and could continue to surprise all of us. Meanwhile with the Euro 500 pips off its high, there is no immediate threat of intervention

from the ECB. French and Italian consumer spending reports are the only numbers due for release tomorrow with most traders off for Good Friday.

Why the Dollar Could Resume Its Slide
In addition to stability in the Eurozone economy, there are also many reasons why dollar weakness could reverse the recent slide in the EUR/USD. Over the next 2 weeks, we have a lot of US economic data that could resurrect speculation of a deeper interest rate cut from the Federal Reserve. We are expecting existing and new home sales, consumer co

nfidence, manufacturing ISM and non-farm payrolls. Given the record amount of foreclosures being reported, there is little likelihood that existing and new home sales will be strong. The latest jobless claims report also points to trouble ahead. We have previously mentioned that job losses could build up in the coming months. Back in 2001 and 2002, the last time growth in the US slowed materially, we saw 15 consecutive months of negative job growth. The sharp jump in jobless claims last week confirms that the labor market will continue to deteriorate as the level of jobless claims ties the high in January, which was the worst since Hurricane Katrina. The rebound in the US dollar, bond yields and the stock market does indicate that risk aversion is subsiding, but as we have seen over the past week alone, risk appetite can come and go in a blink

of an eye. We believe that traders have forgotten the possibility that jobs could be cut for three consecutive months. This morning Citigroup announced plans to layoff up to 5 percent of their staff, which is on top of the layoffs that are expected at Bear Stearns.