The dramatic dive of the US dollar last week showed, if nothing else, the power of round numbers By John Authers

THE SHORT VIEW By John Authers
Copyright The Financial Times Limited 2006
Published: November 28 2006 02:00 | Last updated: November 28 2006 02:00

The dramatic dive of the US dollar last week showed, if nothing else, the power of round numbers. Charts of the greenback against the euro show an almost vertical line after the psychological barrier of $1.30 to the euro was breached. After that excitement, the euro settled above $1.31, and the dollar hit new lows for the year against various currencies, before appearing to stabilise yesterday.

That relative calm shows that the violence of the dollar's move at the end of last week was exacerbated by thin trading. But the dollar has not bounced back. The move still reflects fundamentals. Most importantly, there is what Ashraf Laidi of CMC Markets calls an "unprecedented contrast" between the monetary policy outlooks of the Federal Reserve and those of central banks in Europe and Japan. The latter are all expected to tighten next; the Fed, at least in the market's opinion, will cut rates. This remains the key to the pressure on the dollar.

This can be overstated. If the Fed Funds futures market at the Chicago Board of Trade is right, the most likely outcome is a "perma-pause" by the Fed. It is calling that the next move in the Fed Funds rate will be down but it puts the chance of a cut of 0.25 percentage points by the end of March at only about 20 per cent. It puts the chances that the Fed is still on hold as late as June at about one in three. Speeches from various Fed governors, including Ben Bernanke today, could have a big effect.

Another important variable is the US consumer. Bearish scenarios calling for a "hard landing" hinge on the belief that US consumers will stop spending in the wake of the housing downturn. Yesterday brought contradictory indicators. Post-Thanksgiving holiday shopping seems to be strong, with the National Retail Federation reporting an 18.9 per cent increase in spending compared with last year. But Wal-Mart - as close a proxy for the behaviour of the US consumer as exists - reported that same store sales would fall by 0.1 per cent year-on-year in November. This is the first such fall that Wal-Mart has suffered since 1996. But it was enough to send US stocks down sharply.