Weekly Trading Forecast - 12.13.2010

US_Dollar_FOMC_Could_Drive_Volatility_but_Watch_the_SP_500_body_usdpostingpic.bmp, US Dollar: FOMC Could Drive Volatility, but Watch the S&P 500

US Dollar: FOMC Could Drive Volatility, but Watch the S&P 500

Fundamental Forecast for the US Dollar: Neutral

• US Dollar sinks against all major counterparts on rally in ‘risk’
• Chinese rate hike fears could drive risk-aversion and US Dollar strength
• View our monthly Euro/US Dollar Exchange Rate Forecast

The US Dollar rallied against almost all G10 currencies despite a strong week for ‘risk’ as the S&P 500 closed at fresh multi-year highs through Friday’s close. Correlations between key asset classes broke down in a week where we saw equities and bonds rally and fall at the same time, and the safe-haven US Dollar squeezed out gains despite ostensibly adverse conditions. Attention now turns to the coming week of potentially market-moving event risk, with the US Federal Open Market Committee decision and inflation data likely to cause ripples across global financial markets in the week ahead.

Markets very widely expect that the US Federal Reserve will leave monetary policy exactly unchanged through their upcoming decision, but it will be equally important to monitor for any shifts—no matter how subtle—in official rhetoric. The subsequent days of Consumer and Producer Price Index inflation data will likewise taken on renewed importance as the Fed embarks on controversial Quantitative Easing policies. Given that equity markets and financial companies have generally benefited from the highly accommodative monetary policy, the clear risk is that rising inflation would force the Fed to pull back measures to boost the economy. Likewise significant, recent fears on the future of US Government deficits have led to substantial rallies in US Treasury bond yields—thereby offsetting much of the effects of Quantitative Easing and tightening monetary conditions.

As we close in on the end of the year, it is easy to see that it has been a strong second-half performance for equity markets and a continuation in the secular downtrend for the US Dollar. Yet we maintain that the US Dollar is on pace for further recovery against the Euro and other key counterparts through the shorter-term. Whether this plays out through the final weeks of the year will almost certainly depend on whether stocks continue their recent torrid pace. Yet semi-frequent sharp declines in equities warn that risk sentiment remains fragile, and one gets the sense that any number of catalysts could spark renewed sell-offs in the S&P and other key asset classes. In the short term, watch market reactions around the FOMC result and a steady stream of US economic event risk. – DR

FOREX-Euro falls as debt fears return; more losses seen

NEW YORK, Dec 6 (Reuters) - The euro snapped a three-day advance versus the dollar on Monday and selling pressure is likely to continue as doubts grew that European officials would find a common approach to ease the region's debt crisis.

The euro had earlier fallen more than 1 percent to around $1.3250 as traders took profits on its recent gains. The single currency could head back toward its 2-1/2 month low around $1.2970 set last week, traders said.

Yields on Italian, Spanish and Greek bonds and the cost of protecting them against default rose after Germany rejected a call by the International Monetary Fund to increase the size of a 750-billion-euro safety net for debt-stricken members. For details, see [ID:nLDE6B51WU]

Last week, Ireland became the second country after Greece to require an EU/IMF financial rescue and fears are growing Portugal and Spain will be the next to need assistance. That pushed the euro down 7 percent versus the dollar last month.

"What Europe has done is not enough. They have to have eurobonds," John Taylor, chairman and chief investment officer of FX Concepts, told Reuters 2011 Investment Outlook Summit. Taylor runs the world's largest currency hedge fund with assets under management of around $8.5 billion.

"You can't lend money to Ireland or Greece. You're just piling on more debt to them, and it's getting harder and harder to repay."

He said Portugal could be the next country to seek a bailout after Ireland, with Spain after that. This will push the euro to parity versus the dollar by next year, he said.

FOREX-Euro slumps vs dollar as debt worries reemerge

* Euro down vs dlr, 1st time in 4 days on euro zone woes

* FX Concept's Taylor sees euro to parity vs dollar

* Euro zone finance ministers meet (Updates prices, adds quotes, details)

By Julie Haviv

NEW YORK, Dec 6 (Reuters) - The euro fell on Monday as traders took profits from a three-day rally on signs of division over how to contain the euro zone's fiscal crisis.

The euro's weak performance came as euro zone finance ministers met under pressure to boost the size of a rescue fund to stop a debt crisis from spreading.

The euro zone should have a bigger rescue fund for member states in trouble, and the European Central Bank should boost its bond buying to prevent the sovereign debt crisis from derailing economic recovery, an International Monetary Fund report obtained by Reuters said. [nLDE6B40CZ]

"There is a growing discord among euro zone finance ministers, and that is weighing heavily on the euro today," said Andrew Wilkinson, senior market analyst at Interactive Brokers in Greenwich, Connecticut.

"This discord is prompting a resumption of the bearish trend surrounding the euro," he said. "If this discord continues, I fully expect the euro to be tested at $129.86 this week."

Germany's rebuff to the IMF call reinforced this discord. [ID:nLDE6B40EJ]

In early afternoon in New York the euro EUR= was down 0.90 percent at $1.3294 but above the session's low of $1.3245, according to Reuters data.

Peripheral government bond yields widened sharply against those of Germany after four days of narrowing last week.

The United States is headed for a new recession, said John Taylor, chairman and chief investment officer of FX Concepts, and that should boost the U.S. dollar and weigh on commodity prices.

He added that the euro zone is in a difficult financial situation, with Spain likely to be an issue in 2011. That could push the euro to parity versus the dollar by next year, Taylor said at the Reuters Global Investment Summit on Monday.

FOREX-Dollar up on yields; euro slips on Irish downgrade

Dollar supported by higher Treasury yields, U.S. tax cuts

* Euro slips after Fitch downgrades Ireland

* Market awaits 30-yr U.S. debt auction, U.S. jobless claims

(Adds comment, updates throughout)

By Naomi Tajitsu

LONDON, Dec 9 (Reuters) - The dollar edged up on Thursday, still supported by a jump in U.S. Treasury yields this week, while the euro slipped after ratings agency Fitch downgraded Ireland's sovereign debt.

Fitch cut its rating on Ireland to BBB+ to reflect the additional costs of restructuring Dublin's ailing economy and banking sector, after Dublin secured a bailout from its European neighbours last month. [ID:nWLA0394]

The dollar continued to draw support from an extension of U.S. tax cuts announced this week, but further gains were capped as a retreat in the benchmark 10-year U.S. Treasury yield from a six-month high hit on Wednesday quelled demand for the dollar.

Analysts said the extended tax cuts were seen as supportive for the economy and therefore the dollar, while U.S. Treasuries have sold off heavily this week, as the stimulative move fuelled fears of inflation and deteriorating U.S. fiscal health. [US/]

"The latest fixation is the tax issue and that's created a bond angle, and it's created a growth story that is positive for the U.S.," said Daragh Maher, FX strategist at Credit Agricole.

Other analysts said investors were wary of taking on big positions as liquidity dries up towards year end, and this was why the dollar's rise had been limited compared with the jump in Treasury yields.

The dollar index has risen only 0.7 percent this week as the 10-year U.S. Treasury yield has soared around 25 basis points.

"We've seen a corrective move in U.S. Treasuries, whereas at the moment, we don't see a need for such a corrective move in the dollar," said Antje Praefcke, FX analyst at Commerzbank in Frankfurt.

The U.S. bond market may be vulnerable to more selling if a 30-year U.S. Treasury auction on Thursday attracts only limited demand. A 10-year auction on Wednesday saw average demand.

The dollar index .DXY, which tracks the dollar's moves against a currency basket, inched up 0.2 percent to 80.172. It crept above its 100-day moving average at 79.953, which seen as supportive for the U.S. currency.

GBP: Data on industrial production and manufacturing this morning was mixed

The pound is still well behaved this week, although it would seem, must fall the most. Data on industrial production and manufacturing this morning was mixed: the main index ind. Production lost 0.2% as compared to the previous month, manufacturing grew by 0.6% compared to the previous month. Were more unstable elements of industrial production, such as oil and gas, together with mining operations, which are dragged down production in November. Thus, the markets were not too worried. Meanwhile, these studies BRC, that measure retail activity, proved to be stronger with a total growth of 2.8% y / y. Nevertheless, the same figure from the store turned out to be much weaker and 0.7% y / y. Again, these data were not strong enough in order to assess the response of the market. Pound is likely to fluctuate until the end of the year amid falling liquidity with no clearly defined direction.

JPY: further reduction of the pair USD / JPY should be limited

The yen weakened slightly during the European session. At least, this means that the yen slightly adjusted after growth on Friday against the background of the employment data from the U.S.. This information was relieved to perceived Japanese authorities. While yesterday talked about the probable need for further quantitative easing by the Fed, the continuation was not followed because of fear of the forex market that the dollar will go to growth, supported by the comments of Bernanke. This is the correct score markets, in our opinion, and if the market it will be followed by the further reduction of the pair USD / JPY should be limited.