US Dollar Hits a Record Low! EURUSD Hits a Record High!

February 26, 2008

The Euro hit a record high of 1.4983 against the US dollar which is a tease for many traders who are itching for a break of 1.50. We are sure that a number of stops and option barriers at the 1.50 level is the primary reason why the EURUSD is having such a difficult time breaking it. This tells us that if and when the break occurs, the extension should be sharp and rapid. We do believe that a break of the 1.50 level is just a matter of time. In fact, all month we have been calling for a test of the record highs.

Although US Consumer confidence dropped to a 5 year low, that was not the primary catalyst for the dollar’s slide.

Instead, the downward spiral was triggered by the combination of things including:

1. Comments from Federal Reserve President Kohn
2. Stops being taken out at the prior high
3. Weaker consumer confidence
4. Stronger Eurozone economic data
5. Concerns about what Ben Bernanke will say tomorrow at his testimony on monetary policy

Kohn has already warned us that the central bank will do what it takes to fight a recession. With foreclosures rising 90 percent in the month of January from the same period last year, consumer confidence tanking and oil prices hitting new highs, it is absolutely necessary that Ben Bernanke makes growth his top priority. I doubt that the Senate our House committees will allow him to get away with talking about price pressure when most of their constituents probably feel like the US economy is already in a recession. Therefore even though the annualized pace of producer price growth rose was the fastest pace since 1981, the impact on the US dollar was limited because the market quickly realized that right now, stronger inflationary pressures will not stop the Fed from continuing to lower interest rates.

The futures market is still pricing in a 50bp rate cut for the March 18th monetary policy meeting and recent economic data suggests that the US central bank cannot afford to slow down.

Posted in US Dollar, euro