Dollar Traders Balance Liquidity Concerns against Fed Rate Decision

• Dollar Traders Balance Liquidity Concerns against Fed Rate Decision
• Euro Struggle for Relief with Greece, Moody’s Raises a Red Flag on Italy
• British Pound at the Mercy of Stronger Cross-Pair Trends
• Japanese Yen: Performance Based on Direction and Source of Risk Trends
• New Zealand Dollar Faces another Update on Earthquake Influence
• Canadian Dollar Holding Strong as Rate Expectations, US Oil Drop
• Gold Advances after IMF Warns of Greek Contagion Risk, Lowers US Growth Outlook                                                              

Dollar Traders Balance Liquidity Concerns against Fed Rate Decision

The greenback ended this past week on a notably-weak footing. Though it would be a tidy explanation to simply assign responsibility for the biggest drop in two weeks on the weaker-than-expected reading from the University of Michigan’s consumer sentiment survey, that would ignore the true fundamental currents behind the market. The true culprit behind the stumble is the same that sparked the rally earlier in the week: the global implications of Greece’s financial ‘situation’. When news of the EU member’s political troubles hit the wires Wednesdays, the financial ripples spread quickly as investors scrambled to hedge their exposure to risky European exposure and subsequently taxed the market’s liquidity for short-term funding. This panicked demand for access to capital is the same leverage that pushed the dollar to its heights during the 2008, global financial crisis. Yet, when the need for safety flags, so too does the appetite for the greenback. And, despite the pullback after mid-day through the New York session, equities put in for a positive close for the week; while the euro climbed against most of its counterparts. Through this rebalancing effort, the Dow Jones FXCM Dollar Index found dropped 0.7 percent to close at 9,598.

 

Heading into the new trading week, the same themes will likely remain the dollar’s primary source of direction and momentum. For guidance, the traditional S&P 500 as our benchmark risk appetite will still be the favored barometer. However, to derive a true sense of strength for the dollar; we’ll need to establish the source and quality of sentiment. Improvements in risk appetite will generally have the same result for the currency – losses. It is the potential in failing sentiment that requires careful contemplation. Since liquidity is the dollar’s true allure; we need to keep an eye on the very stability of the financial and funding markets. Measures of volatility (which work well to gauge panic as well as the rates for insurance) and benchmarks for overnight funding are the best indications of dollar strength.

This underlying, fundamental concern aside the economic docket carries a significant round of growth-related indicators (durable goods orders, new and existing home sales); the only event to carry a substantial weigh for the FX market is the FOMC rate decision. Last month, the Fed held rates unchanged (as was fully expected) and Chairman Bernanke delivered his first press conference. These meetings were intended to be quarterly updates; so we shouldn’t expect anything more than the statement. On the other hand, this is the last meeting before QE2 is scheduled to expire. Traders, investors, economists and policymakers will all watching closely to see if there is any mention of the central bank’s plans to increase or work down its extraordinary stimulus going forward. Very early plans for a withdrawal could very well be discussed.  (Forex@DailyFX)