U.S. Dollar Falls as European Central Banks Conduct Dollar Auctions

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Traders will be focusing on LIBOR early Tuesday morning. Everyone wants to see the loosening of the credit markets reflected in a lowering of the LIBOR rate. Traders will be disappointed if this rate does not decline after all the liquidity that has been made available in the system plus last week's coordinated interest rate cut. Continue to monitor LIBOR for direction. If LIBOR does not budge then the Dollar will rally against the Euro unless the ECB intervenes immediately.

The GBP USD opened the week on the strong side as Forex traders seem to have universally accepted the Bank of England's plan to provide support for ailing financial institutions and the Federal Reserve's decision to allow central banks to offer unlimited quantities of Dollars at fixed rates. Look for continued strength in the Pound especially if the LIBOR rate is reduced. This will be proof that the bailout packages and last weeks across-the-board interest rate cuts are having an impact on the credit markets. If confidence is restored in the system then traders may continue to buy British Pounds throughout the week as this market is one of the most oversold currency pairs.

The USD JPY spent most of the early trading sessions under pressure as traders sold Dollars along with the rest of the world. Despite a firm stock market overnight, traders seemed to prefer trading the news that European central banks were flooding the markets with Dollars. Once traders became confident that the uptrend in the global equity markets was real, their appetites for risk quickly grew and traders sold Japanese Yen to fund higher-yielding U.S.-denominated assets. Look for strength to develop throughout the week in the USD JPY if the stock market can maintain gains. The key to bullish equity markets will be a loosening of the credit markets. A lowering of LIBOR rates is likely to be supportive for stocks which should trigger an increase for risky assets. Look to continue with the long side especially if the credit markets begin to thaw.

The USD CHF rallied sharply higher as traders appetites for risky assets increased. Traders borrowed in Swiss to invest in Dollars as confidence seemed to grow throughout the day in the U.S. equity markets. Look for the rally to continue if the credit markets start to show signs of unlocking. Focus on the LIBOR for direction. If LIBOR rates remain high, then barring an intervention from central banks, the USD CHF may give back Mondays gains. A decline in LIBOR and a rally in stocks is likely to send the USD CHF through 1.1500.

The USD CAD finally finished lower after a 10-day rally. Traders have been buying the USD CAD as commodity markets plunged. Pressure has been on commodity prices as many traders felt the credit crisis would trigger a global recession. After the Group of Seven nations pledged to support the financial markets, commodity markets began to stabilize as shorts took profits. A firm crude oil market had the biggest influence on the Canadian Dollar. Watch crude for direction on Tuesday. If crude oil can open strong and continue the rally, look for weakness to develop in the USD CAD. If LIBOR rates remain high then look for the Dollar to resume its rally.

The AUD USD rallied sharply higher on Monday as the Australian government announced a guarantee of banking deposits. With this news speculator appetite for risk immediately increased along with demand for higher yielding Australian assets. With banking deposits guaranteed for at least three years, look for the AUD USD to begin to build a support base in an effort to establish an uptrend and regain much of the recent record loss.

The NZD USD closed strong on Monday as traders bought New Zealand Dollars after the government agreed to guarantee bank deposits for at least two years. In addition to this action, support from European nations also gave speculators a reason to get aggressively long higher risk, higher yielding assets. Look for the NZD USD to build a support base before deciding the trend is ready to turn up. The charts indicate that there is room to the upside, but the huge amount of short interest has to be cleared out first.

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