Lower Commodity Prices Push Dollar Higher

Lower Commodity Prices Push Dollar Higher

The Usd remained strong in the European session based on weaker commodity prices and light economic data out of the US. The EurUsd moved back to the 1.56 level after losing a bit of ground over night mainly due to the speculation that Freddie Mac and Fannie Mae will need to recapitalize. The UsdJpy continues to trade at the low 107 level, while the GbpUsd is testing the 1.97 level. European equity markets declined sharply based on weak economic data out of Germany, while the US markets are mixed due to lighter crude oil prices. Commodities have retreated from recent highs in both energy and metals sectors with oil trading lower at 135 and, gold lower as well at 919. Bonds rallied in Europe prompted by economic concerns following recent data, while treasuries are mixed with yields on the 2yr wider by 2bps, and the rest of the curve tightening based on concerns about future US market performance.

In the Eurozone, the German Chamber of Commerce cited that weak economic data and higher energy prices should lend to a growth rate around 1% in 2009. The market doesn’t expect the ECB to revert to a more dovish tone until energy prices ease further, thus allowing inflation to continue to be a central concern. The UK saw further weakness in the housing sector, and it is reflected in the price of the cable as it is trading with a 1.97 handle against the dollar. DLCG House Price Index came in at 3.7%, which was lower than the prior month but better than expectations which were 3.2%. Consumer confidence will be released later this evening for the UK; we should look for a soft number considering pressures stemming from the housing decline.

The markets are seeing relief in commodity prices, providing room for the dollar to continue its recent rally. With that said, any hint of negative news from the weak performing financials or continued losses in the housing market could cause a significant turnaround in the dollar. Pending home sales fell to -4.7% vs. -2.4% expected, while it is a volatile number, we remain attentive to housing data. Consumer credit is scheduled to be announced this afternoon, concluding a rather light day in economic news from the US.

AC Markets
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