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| Dollar Consolidates Losses After Moody’s Puts US Rating on Review Posted: 14 Jul 2011 04:57 AM PDT
The greenback came off of its lows versus the majors a day after Moody's put the US AAA rating on downgrade for a review. This afternoon a slew of US economic data is due out as is additional testimony by Fed Chairman Ben Bernanke. Given the heightened volatility as seen in the first half of the week, the euro's recent gains may be vulnerable. The dollar extended its potential QE3 induced loss into early Asian trading after Moody's placed the US Aaa bond rating on review for a possible downgrade. The rating agency cited the possibility the debt limit will not be raised in time to prevent a missed payment on US Treasury Bonds. Most expectations are for Republicans and the President to piece together some sort of settlement in time for the August 2nd deadline. In the European session the dollar has come off of its lows versus the majors but the USD is still well within yesterday's ranges following a sharp rout of the dollar after Bernanke's testimony left the door open for QE3. A comparison of Bernanke's testimony yesterday with his last press conference following the Fed Funds decision shows the Fed Chairman's words did not differ from previous policy statements. It will be a hard sell both to politicians and other FOMC members for another round of quantitative easing given the CPI data from May that showed US CPI rising 3.6% y/y and core CPI climbing to 1.5% y/y. But the Fed would in all likelihood step in with QE3 if the economy took a turn for the worst or if deflationary forces began to appear. This makes today and tomorrow's inflationary data all that more important. The European financial elite are meeting in Rome today in an attempt to create an additional rescue package for Greece. Discussions will also center on Italy. Tuesday's successful debt auction helped the euro to recover from a 4-month low versus the dollar but Italian bonds are still trading at higher yields, as are the spreads between Portuguese, Greece, and Spanish debt with their German bund equivalents. The spread between the German 2-year the US-2 year note has dwindled to 91 bps in favor of the bund, a spread that continues to decline, thus supporting the USD. With the lower spreads on the 2-year notes and the EU that is clearly struggling to find a new solution to the debt crisis that will not create a credit event, traders should be weary of further euro gains versus the dollar. With the EUR/USD failing to move above its 100-day moving average at 1.4280 and the pair now testing the rising trend line on the hourly chart from the Tuesday low, his may be an opportunity for euro shorts to reassert themselves. A potential target may be back to the 1.4050 level which is roughly a 50% retracement from the move that began on Tuesday and looks to have ended early this morning. Read more forex trading news on our forex blog. |
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