Selling Dollars Ahead of the FOMC Meeting?

Are traders selling US dollars ahead of Wednesday’s FOMC meeting? Today’s price action certainly suggests that with the dollar weakening across the board. Even though the greenback did strengthen slightly against the Japanese Yen, given the 176 point rally in the Dow, the move should have been far more impressive than the currency pair’s 10 point rise.

The reason why traders may be dumping their long dollar exposure or shorting dollars outright is because no one believes that the outcome of the Federal Reserve meeting will be dollar bullish. Fed fund futures are now pricing in an 86 percent chance of a 50bp rate cut. Although this will only bring interest rates down to 3.00 percent, don’t expect the next rate cut to be the Fed’s last. At minimum, US interest rates will come down to 2.50 percent before this easing cycle is over. Stocks have stabilized, but risk aversion is still the predominant theme in the financial markets.

Sales of new homes fell 4.7 percent, indicating that housing remains weak. Supply also increased to a new cycle high of 9.6 months while the median price of a home dropped over 10 percent. The plunge in new and existing home sales makes it hard to believe that orders for durable goods were strong in the month of December. We already know that retail sales were very weak and we expect sales of big ticket items like furniture to suffer as well. Consumer confidence is also due for release and even though the University of Michigan reported an increase in consumer confidence in the month of January, the disappointment in retail sales makes it hard to believe that the Conference Board’s report will follow suit.

The only thing that can help the dollar would be some groundbreaking stimulus measures announced by President Bush in his State of the Union address tonight.
Unfortunately this is his last State of the Union speech and since more details of the stimulus package have already been announced, President Bush may choose to focus on other issues.

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Written by Kathy Lien, Chief Strategist, DailyFX



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