Forex

Dollar Mired Near Lows on Soft Data

The dollar continues to struggle across the board amid lingering fears that the economy is headed toward a recession – dragging the currency to a new all-time low against the euro at 1.5275 and a three-year low versus the yen at 102.62. Further, what may be more disconcerting for currency traders are heightened expectations for the Fed to aggressively cut rates on March 18th – with Fed funds futures currently pricing in a 74% probability of the FOMC slashing interest rates by 75-basis points to 2.25%. Given the heavy slate of US reports this week, we look for the greenback to remain mired near its lows.

Manufacturing continues to be the Achilles heel for the economy. The reports released today revealed further deterioration with manufacturing showing contraction in February as the ISM manufacturing survey fell beneath the key 50-level to 48.3, albeit slightly less than calls for a larger decline to 48.0. Meanwhile, construction spending plunged by its largest amount in 14-years down by 1.7% in January versus a 1.1% drop a month earlier.

The Reserve Bank of Australia will announce the results of its monetary policy meeting later this evening at 10:30 PM New York time. We look for the RBA to hike rates by 25-basis points to 7.25%, with only a minor risk for a more aggressive 50-basis point hike lingering. The subsequent statement will likely signal further tightening as well given the strength of the Australian economy and persistent inflation.

Euro Powers Ahead

The euro reached another all-time high, rallying sharply to 1.5275 versus the dollar at the start of the week. Economic data from the Eurozone overnight saw firm manufacturing data, with Germany’s February manufacturing PMI improve to 54.3 down marginally from the January reading of 54.4 but better than consensus estimates for a dip to 54.0. The Eurozone February manufacturing PMI was in line with expectations, easing to 52.3 versus 52.8. Also, the Eurozone February flash HICP was unchanged at 3.2% from a year earlier.

Traders will turn to data due out on Tuesday, with Eurozone Q4 GDP and January PPI. Growth in the Eurozone for Q4 is seen slowing to 0.4%, versus 0.8% from the previous quarter and down to 2.3% from 2.7% a year earlier. The producer price index is expected to reveal further pressure in inflation as PPI is seen up 0.8% from 0.1% a month earlier and 4.9% versus 4.3% in the previous year.

The key highlight this week will be Thursday’s ECB monetary policy meeting. While markets expect the Bank to stay on hold this month, close scrutiny will be given to ECB President Trichet’s following press conference. Recent Eurozone economic data have ticked higher thereby alleviating pressure to ease rates and enabling the ECB to continue to focus on containing inflation. We look for the euro to remain supported on the prospects for another 25-basis point rate hike from the ECB this year, bringing its benchmark lending rate to 4.25%