US Dollar Expected to Weaken Further

Thursday, 7 October 2010

With the latest round of quantitative easing measures announced in the USA by the Fed, markets are trading the USD as if there is really no hope left for the benchmark currency. Against major currencies such as the JPY and EUR, the USD is falling by the wayside, creeping lower with each and every new trading day.

On November 2, the Fed is due to announce its interest rate decision following the Open Market Committee meeting. The expectations here are that the Fed will announce a reigning in of the funding that they once extended to banks and finance companies - at the height of the financial crisis.

Even though the US economy is not exactly performing to a stellar level, the Fed has ultimately seen that the market is able to recover on its own, and therefore sees no need for continued support through cheap financing. After all, it has been almost 2 years since the worst of the financial crisis.

On the horizon, the Fed will be closely watching the unemployment numbers in the form of non-farm payrolls when they are released this week. In August, 10,000 jobs were lost in the world's largest economy. However, for the month of September, analysts expect that the economy added 20,000 jobs in total.

However, because this figure is so close to the 0 level, any swing to the negative side might again be detrimental to the USD.

Let's take in to consideration a few scenarios which might pan out. Firstly of course, the non-farm payroll prints at exactly 20,000. This would have little effect on the market, as this analyst expectation is already built in to the current prices.

However, should the figure print negatively, the USD will likely be sold off. On the USD/JPY, this pairing could reach lows of 82.50 - which is not too far from the current quote of the currency. Obviously, at that level, intervention by the Japanese Foreign Ministry would be likely, and we would need to take this in to consideration should the currency pair move towards those levels.

Additionally on the EUR/USD, it wouldn't be a difficult picture to imagine a 100 to 200 pip boost in the currency pair quotes - given that the USD has continued its weak trend to date.