Fwd: Market Directions - March 23, 2008

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From: FX Solutions <sales@fxsol.com>
Date: Mon, Mar 24, 2008 at 9:54 PM
Subject: Market Directions - March 23, 2008
To: "cnszbruce@gmail.com" <cnszbruce@gmail.com>

Market Directions Sunday March 23, 2008 The Bernanke Dollar

Did the Federal Reserve induced equity surge inspire the dramatic reversal in the dollar? Did the 75 basis point cut, 25 less than anticipated, remind the market that the Fed might not take rates much lower unless forced by economic circumstance. Perhaps the FOMC statement, heavy with inflation warnings, recalled to traders that inflation waits in the fall on the other side of the rate reductions, and the Fed will return to the inflation battle as soon as possible. Although the dollar has risen almost 500 points against the euro since Tuesday we have seen several similar rallies in the past few weeks, is there good reason to think this is a reversal in the dollar? The Fed has reduced its target rate by 3.0% in six months. Regardless of rhetoric 2.25% is probably near the end of the Fed rate reduction cycle for several reasons. As witness the FOMC vote was 8- 2 in favor of the 0.75% cut. Two negatives are an uncommon number of dissenters; both negative voters wanted a smaller rate cut. There are three credible reasons for the negative votes: first, a steady diet of rate reductions has a diminishing positive return for the economy and on market sentiment, time must be given for the stimulus to take effect; second, inflation and the weakening dollar are damaging for the economy, though since last August both have been judged not equal to the risks of the credit crisis; a stabilization or moderate recovery in the dollar would continue to encourage exports and would draw capital and investment into the United States. International investors, no longer fearing an ever falling dollar, will quickly realize the great bargains currently on hand in the States; third, if the credit crisis erupts again the Fed will surely want to have saved as much rate ammunition as possible. For these complimentary reasons traders can expect a lessening of the pace of central bank rate decreases. A major spur to the equity rally was simple relief, the hope that the credit and liquidity crisis has passed its peak and that the markets could return to less apocalyptical concerns. Traders want to look to the future. The credit and liquidity crises have prevented that natural market view. Worries about the housing market, except as they provoke more bank and brokerage failures, (and a large exception it is), will have diminishing effect on economic recovery. Housing prices can and probably will continue to fall but as long as they do not threaten the financial system they will return to the background, as they were for most of the past two years. For the next few months gradually worsening economic data will also have limited effect on market sentiment. The Fed has already supplied the requisite economic medicine and traders know that time is required for it to bring a cure. Now that the market is freed (conditionally) from the specter of the credit crisis participants will begin to do what they always do and turn to the future. Traders will attempt to get a jump on the next currency trend. Psychologically, at least the eagerness to move on is palpable. Barring more bank and financial catastrophes, the next trend is likely pro dollar. The euro has been climbing against the dollar since 2002. But since August of last year and the beginning of the credit crisis the rate of ascent has accelerated. Since February it has appreciated even faster. In the short term this ascent is not sustainable. A fall of the euro against the dollar to 1.4500 would only bring it back to the middle of the uptrend range that it has traversed since November 2005. A drop to 1.3500 would only return it to the middle of the uptrend range it has occupied for the past six years. Neither drop would break the long term appreciative trend. The euro can fall almost nine big figures and remain within the positive trend which goes back to the end of 2005. It can fall almost 20 big figures and still be within the uptrend it has held since 2002. Such declines in the euro would be nothing but corrections in the overall tendency. Joseph Trevisani FX Solutions Chief Market Analyst Joe@fxsol.com

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