What Caused the Euro to Break 1.40?

September 20, 2007

It was a busy night in the currency market! The levels that we have been watching for weeks were tested and in some cases broken. The US dollar fell to record lows against the Euro and came within FOUR pips of parity against the US dollar. The dollar is weaker across the board with even the usually weak Japanese Yen strengthening against the greenback.

What happened?

Some blame it on Saudia Arabia, others blame it on pure flow. The breaks were inevitable and I have been talking about this for days.

The UK Telegraph had an article speculating on the possibility of Saudia Arabia breaking their dollar peg after they refused to cut interest rates in lockstep with the US Federal Reserve for the first time. If they drop the peg, many Middle Eastern countries are expected to follow suit. I think that politics would play a major role in Saudia Arabia’s decision and because of that don’t expect a rash announcement.

**Latest update. At 10am, Saudia Arabia denied plans to drop the dollar peg

The Canadian dollar also hit another 30 year high. There are many model funds selling at current levels, which makes the break of parity inevitable. Canadian wholesale sales were very hot (up 2.0 percent vs 0.5 percent expected). This is a very strong leading indicator for retail sales. Expect a similar surprise in tomorrow’s number.

Finally King is under alot of heat this morning as he got criticized for the Bank of England’s delayed response to Northern Rock. This seem to matter little for pound traders since dollar weakness was the dominant driver of currency movements. Retail sales was also strong, helping to keep the pound lifted. M&A flow is always good for the pound as well. Borse Dubai announced this morning that they were going to buy stakes in Nasdaq and London Stock Exchange

Bernanke and Paulson are speaking at 10am EST.

Posted in Bank of England, British Pound, Canadian Dollar, Forex, Forex News, Northern Rock, Saudia Arabia dollar peg, UK, US Dollar, euro, parity