Interest Rate Roundup

Wednesday, November 22, 2006

Dollar breaking down

A few posts ago, I said the Dollar Index was on the cusp of a potentially serious breakdown. It looks like we're getting one today. It's a holiday week, so this may just be a symptom of thin markets. But it shouldn't be ignored if it sticks since this uptrend dates all the way back to the December 31, 2004 DXY low.

What's going on? Investors are concerned the Federal Reserve will react to the housing carnage (and the weakening in the U.S. economy it is causing) by cutting interest rates ... at the same time growth remains strong enough overseas for foreign central banks to either hold rates steady or RAISE them. If that were to happen, the yield differential between rates in the U.S. and rates overseas would narrow, making the dollar relatively less attractive.

Treasuries are on the cusp of a potentially serious breakout as well. The mid 113s on on the continuous long bond future is a key price level. 4.54% is a key yield level on the 10-year Treasury Note. A breakout to the upside in prices and breakdown in rates would be noteworthy -- a sign the U.S. economy could be weakening much more quickly or severely than people believe.


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