The dollar will struggle to extend gains in an environment of falling Libor rates and deteriorating economic conditions.
The Euro was unable to sustain the gains on Monday and weakened steadily with a decline to test lows below 1.2550 on Tuesday before a recovery. Although dollar Libor rates have continued to decline, dollar demand is still at elevated levels as global economic fears intensify. The US currency is also still in the paradoxical position of gaining support against the Euro on bad US economic news, especially with fears over another round of credit de-leveraging.
The Monday US data certainly reinforced fears over the economic trends. The national ISM manufacturing index dipped sharply again to 38.9 in October from 43.5 previously. This was the lowest reading since 1982 and is at a level which is consistent with a recession for the economy as a whole. The data will increase fears over Friday’s payroll report, especially if there is a sharp deterioration for the services-sector index as well.
The US presidential election result will be watched closely with a particular focus on any suggestions over nominations for key Treasury officials. A decisive win for Obama and strong Democrat gains in Congress could weaken the dollar slightly on fears over medium-term budget policies.
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