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The Euro gets a Shocker which helps the Buck!
Several factors started working for the buck all at once lately. And they all started hitting on all cylinders yesterday. Oil went down from a new all time high of $100 a barrel to under $90 within the last nine trading sessions. Gold fell from a new all time high of $916 an ounce down as low as $877 with two days. That’s a fall of almost $50 in two days. Since oil and gold tend to trade inversely to the dollar, this aided the dollar’s recent rise. However, the biggest facet was the “rabbit” that the ECB “pulled out of its hat” yesterday. European Central Bank’s Mersch came out and stated that “downside risks” were a concern. Formerly all they talked about was “fighting inflation” and now they drop this “bomb” on the market. They are now concerned about an economic downturn in the growth of their economy. This surprise forced the EUR/USD to drop a whopping 230 pips in about 3 hours. Needless to say it was a “shocker” to the markets and that’s why traders reacted as they did. This could have been “strategically” done since the ECB is not known for wanting to shock the markets. However, I know they hate the exchange rate being near 1.5000. It’s putting a death grip on their export sector. So this may have been planned. Formerly traders thought the ECB would raise interest rates one more time. Now traders have to consider the possibility of a rate cut. Wow, what a few days make. This may be enough to take the wind out of the sales of EUR/USD. I know the buck sure liked that surprise. It got a breath of fresh air as the EUR/USD pair sank. The selling in EUR/USD also caused a “spillover” effect onto EUR/JPY. The euro selling pressure unwound this carry trade even further (like it was needing help unwinding in the first place). Now that the ECB’s “cat is out of the bag” the U.S. Fed can lower interest rates and it may not sink the dollar as much now as it would have formerly before this information was known. Right now the futures market is pricing in a 100% chance that the Fed will cut by 50 basis points this time. So we’ll see (on the 30th) if the market gets it right. As these Sovereign Wealth Funds continue to come in and “save the day” for American corporations, it will also add support for the beaten down buck. Sean Hyman [url]www.worldcurrencywatch.com[/url]
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