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Dollar Rallies on Investor Optimism at Start First Full Week of the Year

Last updated 1/5/2009 4:43 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Euro pounded on worries over Italian bond scandal
• Yellen endorses a fiscal stimulyus package
• Obama reportedly working on 300 Billion in tax cuts
• Richardson withdraws candidacy as Commerce Secretary
• Israel deep into Gaza as cease fire apperas unlilkey
• Microsoft may pare worforce by 15,000 in January
• Equities firmer on first full week of the year
• Oil at $46 on Mideast worries
• Gold drops 20 to $861/oz

Overnight Eco

• CHF SVME PMI 36.9 better than 34.8 forecast
• EUR Sentix Investor Confidence -34.3 vs. -44 expected as sentiment improves
• GBP Construction PMI breaks the 30 barrier at 29.3 as sector in deep recession

Event Risk on Tap

• USD Challenger Job Cuts
• USD Construction Spending expected at: -1.3%

Price Action

• USD/JPY takes out 9300 as optimism over Obama plans helps
• AUD/USD holds well above 7100 on better risk appetite
• GBP/USD holds 1.4500 though data continues to be woeful
• EUR/USD drops to 1.3700 as dollar strength and worries over Italy weigh

Dollar rallied strongly on the opening day of  the first full working week of  the year as enthusiasm over President elect   Obama stimulus package pushed the unit higher against the yen while the euro suffered a 300 point loss on worries over the burgeoning Italian bond scandal.  According to the Independent in UK , Italian municipalities may face as much as $35 Billion  in losses over a financing scheme  gone wrong, sold to the them by major investment banks such as UBS and Deutsche Bank. The Italian authorities are considering the possibility of suing the principal market makers  or misrepresenting the risks to the municipal investors in these complex over the counter deals.  

The uncertainly over the Italian financing scandal overshadowed the news of a possible tax cut out of Germany  and triggered a wave of stop losses that took the pair from 1.3940 to 1.3660 in less than a hour at the start of European trade. The euro eventually stabilized at the 1.3700 level but the currency is clearly having a difficult time maintaining the 1.4000 handle as doubt begins to seep in to the market over the ECB’s ability to maintain rates above 2% for much longer. As we’ve been repeatedly stating,  ECB hawkish posture will crumble instantly if German unemployment rates begin to escalate and given the woeful state of EZ manufacturing that scenario appears increasingly likely as 2009 unfolds.

Meanwhile the dollar also gained on the yen taking out the 9300 figure amidst speculation that Obama’s stimulus package will help the US economy to recover faster than the rest of  the G-4 universe.  President elect Obama is  reportedly planning more than 300 Billion in tax cuts as part of his economic program to jump start the economy. USDJPY has now found firm footing at the 90 level and with Japanese economy in shambles the yen is unlikely to maintain its reputation as a safe haven harbor, as Japan’s Current Account surplus begins to turn into a deficit. Therefore, the pressure on the yen is likely to persist for the time being.  

The economic calendar remains very subdued as traders get back to work, with only US Construction spending data on the docket  for today. Thus the North American session is likely to be driven by equity flows.  If US investors continue to share the optimism over the Obama stimulus package, the dollar rally may have legs for the rest of the day.  For the time being speculative sentiment has clearly shifted towards the greenback and further gains appear to be in store.   

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.