Independent Analyst: Lena Manousarides, 18th November 2008

publication date: Nov 18, 2008

Dollar Is Looking for Direction! Can Bernanke and Paulson Help?

Another day, another drop in the markets, with DOW JONES finishing yesterday down more than 300 points and NIKEI following in the same direction. Traders are bracing themselves for today’s “interrogation” process of the dynamic duo Bernanke and Paulson which are giving a testimony in front of the Congress. 

Today we had some important economic releases out of the UK with CPI coming out much lower than expected and also the Retail Price Index printing a bad number, showing exactly the level of damage that the UK economy is suffering from. All bets are on now for more rate cuts by BOE in the next monetary policy meeting. The pound although previously showing resilience to further losses, continued to trade on the downside and as long as 1.5070 stays untouched we may see further weakness in the coming days.

EUR/USD continues to trade between 1.25-1.28 and the pair seems to be moving without direction just waiting for the next big event to hit the news. As long as 1.2830 stays untouched, there is great possibility that the pair will move lower again in the coming days. Risk aversion continues to give dollar strength and that is likely to continue till we see signs of stabilisation.
The data out of US showed PPI printing lower numbers and TIC data also coming out stronger - not really surprising as in the last months many investors bought US assets mainly due to risk aversion. The event of the day that the markets are awaiting though is the testimony from Bernanke and Paulson regarding the bailout plan. The Congress will ask them what they are planning to do with the plan and how they will implement it in order to fight the current economic collapse. Traders don’t really expect to hear something different than what has already been said, however it will be interesting to see them trying to answer the difficult questions from the government as to how the problem will be fixed and what the bank is planning to do.

All we hear these days is how the global economy is moving closer to recession and how the level of damage is too much for the banks to handle. Market participants know that they are in for a tough ride in the coming months and the fact that the FED has done nothing to solve problems so far is giving traders the jitters more than ever! It has been implied by the FED and other central banks that interest rates will go even lower in the coming weeks in order to ease inflationary pressures, but what about when inflation starts to rise again? Where will that leave us? Unemployment figures are rising dangerously in the US and Europe, GDP numbers are getting trashed and inflation is easing. The Dollar is getting bought all across the board due to risk aversion and markets continue to fall on a daily basis. 

However one would wonder, until when will traders continue to buy the buck? At times when the real fundamentals do not reflex the currency at all, it makes one think that one day investors might wake up and realise that their perspective dollars are not worth a lot.  Then is when the real problems start as everyone will try to get rid of their dollars and buy back other currencies and therefore more problems will eventually arise.  The world leaders are trying their best to avoid panic in the markets but until we see reasons not to panic, investors will try their best to get rid of risky assets and therefore market collapse will be far from over.

Let’s see how the markets will react today and if the wise words of Bernanke and Paulson convince the market participants…