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The Dollar had another uncomfortable week. Its losses were due almost entirely to two bad economic data, each of which cost it an almost instant cent. Having been lulled into a false sense of security by Monday's Labour Day holiday and a softer but adequate services sector PMI on Tuesday the Dollar took its first smack in the teeth on Wednesday from news that Pending Home Sales had fallen by 12 per cent in July.

 

It was the biggest ever monthly drop for the number, which counts the residential properties for which contracts have been exchanged but not completed. The next blow came from Friday's employment report. Non-farm Payrolls had been expected to rise by more than 100,000 in August. When news of a 4,000 fall was accompanied by an 81,000 downward revision to previous months' data the market threw up its hands in horror. Although other areas of the US economy seem to be ticking along quite steadily the bad news from the property sector and the decline in payrolls combined to make investors much more worried about the economy as a whole. The word 'recession' is now being bandied around much more freely and analysts fully expect a cut of at least 25 basis points in the benchmark Federal Funds Rate next week.

Sterling had a week of mixed fortunes. There was little doubt that the Bank of England would leave its target interest rate unchanged at 4.75 per cent. The surprise came when the Old Lady issued a press statement to explain the decision. When the MPC leaves rates unchanged it does not normally issue a statement. It has done so on only two previous occasions; when it was worried about emerging markets in 1998 and when it was worried about undue Sterling strength six months later. Investors therefore inferred that the Bank must be worried now. Sterling has also suffered as a result of the whispering campaign that blames the Bank for not doing enough to help during the continuing liquidity crisis that has seen three month interest rates rise by one percentage point. The official line from Threadneedle Street is that its provision of day-to-day cash fulfils its obligation; for any longer maturity it is up to the market to set its own price. Some of the banks do not see it that way and look to the Bank of England to do more to help.

So what to do?
There is more to the US economy than residential property and jobs but weakness in those two areas is almost bound to have a depressing effect on the bigger picture. It is possible that weakness in the US economy will have a negative impact on the rest of the world but there are no signs of that as yet. It is therefore likely that the Dollar will weaken further.
Buyers of the Dollar should hold off for better levels, protecting themselves with a stop order in case the global market stumble into another unexploded bomb.

 

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Source: Moneycorp