Whither the dollar?
Strong consumer price of the United States of data led to a lower than expected Federal Reserve lowering interest rates, causing the biggest one-day rally in the dollar against the euro since May 2005. At the end of the day, Friday the 14th, the euro fell 1.5 percent to 1.4412, has never been so low since October. This is the third week in a row that the dollar has rallied against major currencies.
Effective consumer spending reports were used in part to reduce concerns that the mortgage crisis force of the American economy into a recession, and the generalization of inflationary concerns seem to point to maintaining a conservative approach reductions in interest rates by the feds, which is more good news for the greenback.
Many analysts are now predicting the dollar rally will continue in the short term, fingering 1.43-or 1.40-that the reasonable levels of support. In addition, there was an increase in the chorus of voices saying that the dollar will rebound in 2008, due to the decrease in budget and trade deficits. If we have reason to believe that the Fed will be conservative in cutting interest rates, this will lead to increased appetite for international investment in the American market, creating greater demand for the dollar.
However, we are wary that the dollar rally is simply a correction rather than a trend reversal. In addition, we would not be surprised to see another test of the $ 1.50 level in the short term, although the outlook for the dollar in 2008 are good.