Modest dollar rally fades on belief Fed will cut rates more

Filed under: International markets, Other issues, Housing, Federal Reserve

The dollar’s modest rally faded Tuesday afternoon as traders calculated that the U.S. Federal Reserve is likely to continue to cut key, short-term interest rates by another 50 basis points to jump-start the anemic U.S. economy.

In mid-day Tuesday trading, the dollar was substantially lower against the world’s other major currencies. The dollar fell almost 2 cents to $1.5596 versus the euro, about one-half yen to 100.22 versus Japan’s yen, and about 1.5 cents to $2.0003 versus the British pound. The dollar also fell about 1 cent to $1.0095 versus the Swiss franc.

Short-lived dollar rally

Some traders had argued that the dollar would be able to post its second straight weekly rise on renewed confidence that the U.S. economy would perform better than expected, with a shallow recession, said Andrew Resnick, independent currency trader. But those comments most likely will be categorized as ‘famous last words’ based on recent U.S. housing data, which suggests continued U.S. economic sluggishness up ahead, he said.

This means the Fed “is likely to continue to cut interest rates,” which is bearish for the dollar, Resnick said, adding that he is presently flat, with no open currency trading positions.

Housing sector woes

Earlier Tuesday, the markets received word that U.S. housing prices in 20 major cities, as measured by the Case-Shiller Home Price Index, dropped 2.4% in January 2008 and an alarming 10.7% on a year-over-year basis.

Resnick said it’s hard for traders to feel confident about a U.S. recovery without a rebound in the U.S. housing sector, given the large swath of economic activity that housing affects. And, by extension, “there’s no dollar recovery without a U.S. economic recovery,” since sluggishness will keep rate-cut pressure on the Fed.

For the above reason, among other factors, Resnick is sticking with his bearish dollar prediction made at the start of 2008. Resnick said he expects the dollar to fall to 95 yen by the end of 2008. He also expects the dollar to fall to $1.65 versus the euro and $2.05 versus the British pound by the end of 2008.

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This entry was posted on Sunday, March 30th, 2008 at 3:09 pm and is filed under Real Estate and Housing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.