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Monday, September 15, 2008 11:33 AM

US Dollar Rally Not Over Yet

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Those looking for a collapse in the US dollar in the wake of the Lehman bankruptcy did not get it. The US dollar index was down huge last night but has now rallied to even.

US$ Index - 30 Minute Chart

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Euro Rally Stalls

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Click on either chart for a sharper image.

China Cuts Rates, Lowers Reserve Requirements

In US dollar friendly news, China Cuts Rates as U.S. Turmoil Adds to Global Risks.

China cut interest rates for the first time in six years and allowed most banks to set aside smaller reserves as worsening credit-market turmoil and weakening export demand dimmed the outlook for economic growth.

The People's Bank of China reduced the one-year lending rate to 7.20 percent from 7.47 percent, effective tomorrow, and lowered the reserve ratio at the nation's smaller banks by 1 percentage point. The changes were in a statement on the central bank's Web site today.

"Policy makers see the probability of a recession in the U.S. is higher now, so the outlook for Chinese exports has deteriorated," said Darius Kowalczyk, chief investment strategist at CFC Seymour Ltd. in Hong Kong. "This is the beginning of an easing cycle in China." He was the only one of seven economists in a Bloomberg survey last week to predict a rate cut this year or in the first quarter of 2009.
For the dollar to hold its own in the wake of the Lehman bankruptcy and the Fed's emergency liquidity actions (see Fed's PDCF, TSLF Pawnshop Limits Increased; Section 23A Rules Violated) is rather impressive. Those looking for continued strength in the dollar are likely to get it if the Fed does not cut rates at Tuesday's FOMC meeting.

Mike "Mish" Shedlock
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