The dollar’s drop from a five week high against the euro is being blamed mainly on speculative reports that show that American retail sales and manufacturing falling as the global economy continues to deepen. The dollar also fell for the first time in days against the British pound, and Federal Reserve Chairman Ben S. Bernanke finally stated that a changed government fiscal policy is not going to lead to economic recovery. The Fed feels that the American government is going to have to find some way of stimulating more growth.
“The dollar is giving back some gains after a recent rally,” said Ian Stannard, currency strategist in London at BNP Paribas SA, the largest lender in France. “Comments from Fed policy makers and bearish views on the data this week may have triggered the selling. I see the correction as short-lived. Longer term, the steps taken by the U.S. will help the dollar.”
How bad did the dollar fall? It fell to $1.3236 euro from $1.3182, 89.43 yen from 89.38, and to $1.4501 against the pound. Stannard feels that the dollar could fall further against the euro on Wednesday, January 14, 2009, possibly closing at $1.3350.
Bernanke stated in a London speech that ‘strong measures’ are what is needed to stabilize and strengthen the weakened financial system. “More capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets.” American retail sales fell for sixth months straight in December, the longest decline since 1992 when this type of information started to track.
“We expect U.S. retail sales to worsen significantly,” said Masafumi Yamamoto, the head of foreign-exchange strategy for Japan at Royal Bank of Scotland in Tokyo and a former Bank of Japan currency trader. “There’s a high chance that the dollar will face renewed selling pressure versus the yen.”
Analysts are forecasting that the ECB will lower its 2.5% main rate by at least a half a percent point as early as Thursday, possibly deeper. The ECB has only cut rates 1.5% since the beginning of 2008 while the Fed cut theirs by 4 percentage points. Even the Bank of England has only lowered theirs to 1.5%. “There are a lot of orders to sell the euro,” said Akio Shimizu, who is the chief manager of foreign-exchange trading in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan’s largest publicly listed bank. “Interest-rate cuts are likely and that is weighing on the euro. There’s not much good economic news coming out of Europe.” He went to add that the euro could decline to $1.3100 before the end of trading today.
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