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Over the past month, the value of the US dollar has fallen significantly with the once mighty greenback dropping to a record low against the Euro and a 31 year low against the Canadian dollar.  For currency traders, the dollar’s weakness has provided plenty of opportunities, but for the average person living in the United States, what does a weak dollar really mean?  As there are two sides of every coin, a weak currency also has its advantages and disadvantages. 

At a time when the US housing market is contracting, the job market is deteriorating and consumer spending is at risk, the

US economy needs a weaker dollar.  This is the primary reason why we do not expect the

US government and the Federal Reserve to stand in the way of further dollar weakness. 

Benefits of a Weaker Dollar

1) Increased Exports – One of the biggest reasons why a weaker dollar will help the US economy is because it increases the competitiveness of US goods.  It boosts foreign demand while keeping

US consumer demand domestic.  Over the medium term, this benefits the sales of US corporations which will eventually translate into more jobs and consumer spending.  It also helps to reduce the trade deficit, one of the most criticized aspects of the

US economy. 

2) Foreign Investment – There are three different ways that foreign investment can help the

US economy and the US dollar.  Over the past few years, foreigners have been big buyers of

US real estate.  According to a study by the National Association of Realtors, about one in five American real estate agents sold a second home in the year ending April 2007 to a foreign buyer.  A third of these buyers come from Europe, a quarter from Asia and 16 percent from

Latin America.  As the US dollar continues to fall in lockstep with house prices, foreign buyers could provide the support that the

US housing market needs to avoid a major crash.  The second support would be in the form of value hunting in the

US equity markets.  If the dollar continues to fall, foreign investors may begin to load up on companies with sound fundamentals that are also less vulnerable to a

US economic slowdown. Both of these factors are contingent upon the US dollar showing signs of stabilization.  Foreign investors will only swoop in with size when they believe that dollar weakness is nearing an end.  The third factor is less contingent upon the outlook for the US dollar.  A weaker dollar also makes US corporations more attractive buyout targets.  Sovereign wealth funds of countries like China and

Dubai are flush with cash and are on the lookout for good investment opportunities.

3) Increased Tourism – Tourism represents a big part of the

US economy. It supports employment for over 5.4 million workers and generates over $550 billion in annual revenue.  Canadians represent the biggest group of travelers into the

US.  We expect their share to rise even further now that the Canadian dollar is trading at parity with the US dollar.  In the beginning of this year, a USD$250 hotel room cost CAD$295, now it only costs CAD$250, which represent savings of over 15 percent.  Although the savings for Europeans are not as large, they too will see anywhere between a 5 to 10 percent discount in travel costs.  More tourism is always good for an economy. 

Disadvantages of a Weaker Dollar

1) Higher Costs for Foreign Goods – The most immediate disadvantage of a weaker dollar is the increased costs for foreign goods.  With a trade deficit of $59.2 billion, US consumers import far more than they export.  The number one country that the US imports from is

Canada, which is why the recent strength of the Canadian dollar is so important. Canadian drugs for example may not be as much of a bargain as they use to be.  The same is true for European handbags and other luxury items.

2) Tighter Monetary Policy – Higher costs for foreign goods imports inflation which is why a weaker currency in general is inflationary.  With oil prices hovering around $80 a barrel and the dollar falling through the floor, inflation is sure to pick up in the coming months.  Martin Wolf of the Financial Times makes a fantastic point when he said that “The resolution of each crisis lays the seeds of the next.” In order to get out of a crisis, the Federal Reserve will usually lower interest rates aggressively.  We saw this after the Asian and Russian crises of 1997 and 1998.  This eventually led to bubbles in the financial market, forcing the Fed to hike interest rates.  Although inflation is not a huge problem at the moment, the threat of inflationary pressures could prevent the Fed from lowering rates as much as they would have otherwise wanted or needed.

3) Foreign Travel Becomes More Expensive – From a consumer level, the weakness of the US dollar makes foreign travel more expensive, particularly to countries like Europe and

Australia.  Since the beginning of the year, the Australian dollar has appreciated more than 10 percent against the US dollar. Because of nothing other than currency fluctuations, travel to

Australia has become 10 percent more expensive.  The same is true for travel to

Europe except for the fact that the move is smaller on a percentage basis.

Can the US Dollar Fall Further?

The answer is yes.  A trend in the currency market can last far longer than many people would otherwise expect. We have seen one way directional moves last for months and in some cases, even years.  Interest rate outlooks play a major role in the future direction of currencies so with the market pricing in another 125bp of easing by the end of next year, the US dollar could easily fall to 1.50 against the Euro.  This is especially true if the ECB remains nonchalant about the Euro’s move.  At some point, the benefits of a weaker dollar such as increased exports and foreign investment will help to turn the

US economy around, at which point the dollar will begin to rise once again.

What Does This Mean for Your Investments?Regardless of whether you are actively involved in the currency market or monitor it at all, the value of the US dollar or currencies does matter.  Companies that do a lot of foreign sales will benefit the most because their foreign currency revenue will be higher when repatriated not because they sold more goods, but because their earnings from currency conversion will be larger.  The industries with the greatest foreign sales exposure are energy, technology and consumer staples.   Companies that produce commodities usually also benefit from dollar weakness while the companies that will be hurt the most are big importers.  If you have a view on where the US dollar is headed or want to hedge against some of your stock market exposure, the purest way to do so would be through trading or investing in the US dollar directly in the currency market. 

By Kathy Lien, Chief Strategist of DailyFX.com

Source: Daily Fx

Fed Chairman’s Bernanke made a speech in front of the U.S Congress saying that the credit crisis has created a “significant market stress”, but reassured that regulators would take steps to curb fallout due to the mortgage crisis.

This happened after the US market continued to witness a further deterioration. The USD fell again, setting a fresh record low mainly against the EUR and the CAD. Growing concerns about the US economy and the possibility of further interest rate cuts by the Federal Reserve are the main reasons behind the US dollar’s continuous weakness. The USD is trading around the 1.4095 level against the EUR.

Fed Chairman’s Speech came just two days after the Federal Reserve cut a key interest rate by 0.5% in order to prevent the weight of housing and credit problems from sinking the economy.

The Greenback weakness continues to dominate financial markets as last day’s headline figures showed little signs of hope. One of the few positive US economic indicators seen through recent trade was yesterday’s Philadelphia Fed manufacturing report that showed a slightly more optimistic picture of regional industrial production. The headline figure released at 10.9, far above consensus estimates of 3.0, for the month of September.

There is no significant economic news expected to come out of the U.S today, apart from the Fed Governor’s Mishkin and Fed Governor’s Kohn speeches on monetary policy in Frankfurt.

Source: ForexTVBlog

One of the strongest signals generated by technical indicators is MACD divergence on a daily chart.  MACD stands for Moving Average Convergence/Divergence and can be quite useful for giving hints of a possible market reversal.

We calculate this indicator by generating a 12 period Exponential Moving Average and a 26 period Exponential Moving Average and plotting the difference on our chart.  We then add a 9 period Exponential Moving Average of that figure and plot that as our Signal Line.  We now look for two situations. Positive Divergence is when the MACD makes a higher low but the market makes a lower low.  This situation gives us a hint of a possible reversal to the upside. The other situation is Negative Divergence and is noted when the MACD makes a lower high while the market makes a higher high.  This situation gives us a hint of a possible reversal to the downside.

If you are a trend trader and only trade in the direction of the daily trend, you would not look to initiate a new buy position when noting Positive Divergence or a new sell position when noting Negative Divergence.  However, if you were already in a trade and the MACD showed a possible reversal, you should tighten up your protective stop by moving it closer to the current market price to protect any profits that you may have in the trade at that time.  As with any technical indicator, the best signals will come on the daily chart and as the time frame shortens, the reliability of the signal weakens.

Sourced from Thomas Long, FX Power Course Instructor

Source: Daily FX

The forex market maybe open 24 hours a day like a Super Wal-Mart, but that doesn’t mean it’s always active the whole day. You can make money when the market moves up, and you can make money when the market moves down. However, when the market doesn’t move at all, you’ll have a very tough time trying to make money and probably will end up losing money. Find out when the best times of the day for you to trade are.

Learn more here.

Source: babypips.com

The Euro Zone manufacturing Purchasing Managers’ Index – PMI signaled moderation in the manufacturing sector in August, results of a survey showed Monday.

The latest report from the Royal Bank of Scotland and NTC Economics revealed that the Euro zone manufacturing PMI fell to 54.3 in August from the 54.9 in July. The number came in slightly higher than the flash reading of 54.2, released earlier. The report noted that the PMI fell to a 19-month low level in August.

A PMI reading above 50 reflects expansion in the manufacturing sector, while a level below 50 indicates contraction.

The headline manufacturing PMI indicated further weakening in new orders growth in August. The report noted that although new orders grew for the twenty-seventh straight month in August, the pace of growth eased. Export growth dropped to a three-month low in August. The continued growth of exports in Germany and Italy contrasted with weak growth in France and Spain.

Output growth remained down on the average seen through the first half of the year. The pace of increase was up only marginally from the eighteen-month low level witnessed in July. German manufacturers showed the strongest production growth of the big four nations, while Spain posted the weakest expansion.

Investment goods production showed the strongest growth, with the growth steadying at a sharp pace. Production of consumer goods also remained strong in August and stood above the average for the first half of the year. Production of intermediate goods rebounded in August, following a decline to a twenty-one month low level in July.

The survey results showed that backlog of work improved for the twenty-sixth consecutive month and suppliers’ delivery times stretched for the twenty-seventh successive month. The pressure on manufacturing capacity revealed signs of easing in August. Germany had the strongest growth in outstanding workloads, while Italy and Spain revealed modest fall. Delivery times continued to lengthen in each of the big-four nations covered, with German manufacturers continuing to report the greatest incidence of delays.

Commenting on the Euro zone Manufacturing PMI, RBS Chief Euro Area Economist, Jacques Cailloux said, “Today’s Eurozone Manufacturing PMI release confirms the message of the earlier Flash estimate, of the gradual slowdown of industrial sector growth in the face of rising interest rates, the strong euro and high oil prices. Citing the weak new business and outstanding workload indicators, Cailloux stated. “…the downtrend in growth of output looks set to continue in the short-term at least.”

Further, the survey revealed that input price inflation slowed in all big-four nations in August. Input price inflation eased to a 17-month low level in Germany and an 8-month low in France. Output price inflation also showed easing in August, falling to the lowest since February 2006. Factory gate price inflation slowed in Germany and France, while it picked up modestly in Italy and remained stable in Spain.

The economist noted, “…with the latest survey providing further signs of an easing of pressure on manufacturing capacity, pipeline pressures should remain under control through Q3.”

Employment in manufacturing sector grew for the eighteenth months, as firms added staff to boost capacity. The growth rate stood above the long-run series average, but slowed for the second month running to the weakest since last October.

The German manufacturing PMI declined to its lowest level for a year and a half in August. The PMI reading dropped to 56.0 in August from 56.8 recorded in July. The fall in new order growth and employment expansion led to the decline in PMI reading.

The French manufacturing PMI also showed easing growth in August. The headline PMI reading slid to 52.5, the lowest level since January. The indicator slid from 53.3 registered in July. The slowdown was driven by the lackluster growth of new orders.

Meanwhile, the Italian manufacturing sector maintained solid growth in August, reflecting further rise in output and new orders. The headline index of NTC/ADACI PMI rose to 53.6 from 53.3 recorded in the prior month.

The Spanish Manufacturing PMI slowed to 52.2, marking the weakest reading since October 2005.

The PMI data came just days ahead of the interest rate announcement of the European Central Bank, due later in the week. In August, the ECB maintained its key interest rate at a six-year high. The ECB held the minimum bid rate on the main refinancing operations at 4.0%, the highest level since August 2001. Euro zone interest rates were hiked in eight instances since late 2005.

Most analysts expect the ECB to leave its rates unchanged at 4.00% this time in the backdrop of the recent turbulence in the financial markets due to problems in the US subprime market. That said, the central bank is widely expected to lift rates to 4.25% as early as October, while some even see a further quarter point hike coming in December. However, some analysts commented that the bank could delay a tightening move in the wake of recent market turmoil.

Source: RttNews