Opinion by Kathy Lien

US Dollar

.... The fundamental factors that are driving the dollar higher today include falling oil prices, a rebounding stock market, intervention risk and hawkish FOMC minutes..... Lower oil prices is a big relief for US consumers and businesses... . the dollar is also benefitting from speculation that the Federal Reserve could intervene to prop up the US dollar. In his testimony this morning.... Bernanke may be warning about possible plans for intervention, but we think that is unlikely. According to the minutes from the June FOMC meeting, Fed officials were prepared to raise interest rates “very soon.” They felt that growth risks diminished but inflation was on the rise.... but lot has changed since June; Growth risks have increased significantly and inflationary pressures or at least inflation expectations are beginning to ease. The same can be said of the Treasury International Capital flow numbers which indicated that even though foreign purchases of US securities fell last month, there is no sign that China or Japan has reduced their holdings of US dollars..... We suspect that the data for June and July will look very different. Finally, other pieces of US data were mixed. Consumer prices raced to the highest level since 1991 on an annualized basis, industrial production was strong but the NAHB housing market index fell to a record low. Given current market conditions, traders should forget about a rate hike from the Fed this year. Inflation is a problem, but the stability of the financial markets; growth and global investor confidence are even bigger problems. If oil prices fall back towards $120 a barrel, the Fed will remain on hold for the remainder of the year.

British Pound: UK Unemployment Rises by the Most in 16 Years

The latest labor market report from the United Kingdom confirms that the UK economy is in trouble. Jobless claims rose by 15.5k, the largest increase in 16 years with average earnings growth including and excluding bonuses falling. The layoffs in the financial sector and the problems in the housing market have taking a big toll on the UK economy. We fully expect employment to deteriorate further in the coming months which will prevent the Bank of England from raising interest rates despite strong inflationary pressures. The weaker outlook for the UK economy has not hurt the British pound much, as the currency is holding up well against the US dollar and Euro. Even though the pound fell victim to dollar strength, it is still trading above Tuesday’s low.

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