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Rate cuts halt EUR/USD fall

Over the past few days, the euro has finally broken out of its weeks-long slump against the dollar. Federal Reserve Chairman Ben Bernanke announced on Tuesday that the Fed would be taking the unprecedented act of buying three-month commercial paper, and today, central banks around the world made coordinated reductions in the target lending rate. Anticipating an easing of the credit squeeze that has driven the dollar’s recent rise against the euro, traders sold USD and bought EUR in today’s online trading. As of 4PM EST, the euro had made its biggest gain against the dollar in more than two weeks, moving from 1.3585 yesterday to 1.3658.

A strong week for USD

Based on the price movement of EUR/USD over the past week, one could say that it’s been a strong one for the U.S. dollar. From a high of $1.47669 on September 25, EUR/USD has fallen to $1.40082 as of this afternoon. The past seven days of online forex trading have even featured the euro’s greatest one-day decline against the dollar. But there’s little to cheer about in the U.S. economic outlook, and EUR/USD moves have been driven far more by Eurozone bank failures and the reluctance of U.S. banks to lend, which has tightened up the dollar supply. This week, the European Central Bank has offered one-day loans of 30 and 50 billion dollars to help maintain interbank liquidity while calling for banks to turn in surplus euros at a rate of 4.25%.

It’s difficult to forecast how the passage or rejection of the revised bailout plan is likely to affect EUR/USD. The premature announcement last week of a “fundamental agreement” actually saw the euro gain against the dollar in that afternoon’s immediate forex trading. Though a failure by the government to intervene will likely damage both the dollar and the economy, the addition of hundreds of billions of dollars to the U.S. deficit could also have a deleterious long-term impact on the dollar’s position in the forex trade market. For now, it looks like a lose-lose situation for USD, notwithstanding the woeful economic news coming out of the Eurozone.

A “buying opportunity” for EUR/USD?

The dollar experienced a temporary surge against the euro early today as online forex traders anticipated an announcement that Congress had reached an agreement on the proposed bailout of Wall Street. EUR/USD had moved as low as $1.45599 before Sen. Christopher Dodd, chairman of the U.S. Senate Banking Committee, announced this afternoon that a “fundamental agreement” had indeed been reached. The reaction from the forex trading community was markedly ambivalent, especially in contrast to the stock market, where the Dow Jones had added just about 200 points as of nearly 3PM in New York; EUR/USD currently stands at $1.46150 and has moved primarily upward throughout the afternoon.

Click on image to enlarge.

As the ten-year chart above reveals, the past several months of EUR/USD price activity have been historically aberrant. Yet despite some worrying economic news and the likely impact of the bailout on the federal budget deficit, most currency trading analysts are either neutral or bullish on the greenback. FX Street’s Analysts Sentiment Index for EUR/USD shows 50% neutral, 33% bullish, and only 17% bearish. Daily FX likewise reports “effectively neutral speculative positioning” at this time.

However, Bloomberg has been reporting this week on some forex analysts who are emitting very distinct growls. On Tuesday, TD Securities economist Joshua Williamson said that U.S. deficit issues could push the dollar up to $1.95 per euro. And today, a research note from Citigroup called the current euro price dip a “buying opportunity.” The euro could move up to $1.53, according to the Citigroup report.

EUR/USD down over 2.1%

In today’s forex trading, the U.S. dollar suffered one of its biggest ever one-day losses against the euro on fears that the $700-billion bailout plan proposed by Treasury Secretary Henry Paulson will further exacerbate the growing federal budget deficit. EUR/USD stood at $1.4794 as of 6:41 EST, up from $1.4466 yesterday. Percentage-wise, the dollar was down over 2.1% according to Reuters Dealing, the largest one-day drop for the greenback since January of 2001. Since reaching a high of $1.3882 on September 11, the dollar has fallen more than 6% against the euro.

Mood Swings for EUR/USD

This has officially been the most volatile week for the global currency trading market since the Asian financial crisis of the late ‘90s. Interday trading of EUR/USD went through significant swings as the dollar gained ground on word that the U.S. Federal Reserve had chosen not to change interest rates, only to plummet against the euro on the shocking news that the federal government was rescuing American International Group with an $85 billion loan. The Bank of Japan’s decision to hold interests rates at their current level of 0.50% also contributed to the dollar’s decline in today’s online trading. EUR/USD moved from 1.4121 yesterday to 1.4348 as of 4:18PM EST today.

Looking ahead, a bearish interest rate environment for the euro suggests that the dollar may actually gain ground despite perilous conditions in the U.S. financial market. A survey released today by Bloomberg also found forex analysts to be optimistic about the dollar, which they expect to benefit from a slowdown in European economic growth.

Euro over a barrel?

EUR/USD dropped to its lowest level in seven months during today’s online forex trading on news that the European economy had contracted by 0.2% in the second quarter. The declining price of crude oil has bolstered the dollar in recent days, helping the greenback to extend the gains it made against the euro in August. As of almost 5PM EST, EUR/USD stood at 1.4493, down from 1.4520 Tuesday. Forex analysts charting the trajectory of the EUR/USD over the past two years place the pair near its long-term uptrend support line of 1.4473.

The EU economic slowdown was attributed to several factors, including a decline in exports, consumer spending, and company investment. Crude oil fell to $109.46 a barrel on demand worries tied to the global economic slowdown and news from Royal Dutch Shell Plc and ConocoPhillips that Hurricane Gustav had not caused any damage to platforms in the Gulf of Mexico.

Falling oil prices are likely to increase pressure on the euro in the currency trading market over the coming weeks. Many analysts expect crude prices to plummet nearer the $100 mark, and BusinessWeek reports that some analysts are predicting a price floor of $80 a barrel.

For the euro, August is the cruelest month

It’s been a volatile year for those who engage in online trading of the EUR/USD. In 2007, the dollar fell off as much as 13% against the euro. Until this month, it looked like 2008 would also be a banner year for the Eurozone’s currency. The euro surged above $1.60 in both April and July forex trading, hitting an all-time high of $1.6038 on July 15th. But based on the vicious beating that the euro has taken in August, T.S. Eliot’s assertion that “April is the cruelest month” might need to be reconsidered. On August 8th, the euro dropped below $1.50 for the first time since February and below its 200-day moving average for the first time since 2006. As of this writing, EUR/USD is hovering around $1.4673.

Many forex analysts anticipate that the remainder of 2008 will see the euro continue to decline against the dollar. On August 7th, in a statement that at least indirectly led to the next day’s online forex trading debacle, ECB president Jean-Claude Trichet opined that the third quarter would be “particularly weak” for Eurozone GDP growth. As the recession that grips the U.S. spreads beyond its borders, the dollar is likely to strengthen, further challenging the dominant EUR/USD trend of the past years.

More EUR/USD-related forex news to follow…