Dollar: 1.50 Inevitable?

From: DailyFX, Monday, 12 November 2007 04:35:51 GMT

Dollar dumping continued this week as EURUSD reached yet another record high of 1.4749 and talk on the dealing desks turned to the psychologically important 1.50 figure. Certainly the greenback has few friends these days, as markets remain convinced that the repercussions from the blow up in the subprime sector will continues to weigh on both the financial industry and the US consumer forcing the Fed to continue easing well into 2008 which in turn will make the dollar even less attractive to foreign investors.That theme was reinforced this week after Cheng Siwei, vice chairman of the National People's Congress stated that China should invest its nearly $1.5 Trillion of FX reserves in stronger currencies. The FX market instantly interpreted the remarks as a sign that the Chinese will begin diversifying their currency assets away from the greenback pushed the dollar to new lows. As we noted on Wednesday,” Although, Mr. Siwei has a history of making broad economic comments that often do not reflect actual policy, and although the National People’s Congress is not involved in directly setting currency targets, today reaction speaks volumes about the extent of anti-dollar sentiment present in the FX market right now.”Yet with the market fixated on the 1.5000 figure the EURUSD may necessarily reach its mark. Positioning in the pair is beginning to reach extremes on the IMM, although our own SSI index shows more room to go. Just as oil failed to hit $100/bbl, the EURUSD may do the same for no other reason than simply because everyone expects it to do so. Next week. US Retail Sales and the TIC data will be the pivotal releases on the docket. With markets so uniformly dour on both the US consumer and foreign inflows into the US, positive surprises in the two releases could finally trigger a rebound in the greenback. On the other hand, further negative data will only embolden dollar bears and a run at the 1.5000 level could become a distinct possibility regardless of skew in sentiment.

Written by Boris Schlossberg, Senior Currency Strategist and John Kicklighter, David Rodriguez and Terri Belkas, Currency Analysts