There have been a number of fundamental factors come to light over the last twenty-four hours which have helped accelerate the short-covering rally in the greenback.
The PBOC’s statement that it will take into account capital flows and major currency movements in making FX policy coupled with a call for greater flexibility in that exchange rate from Asian neighbors (as well as Geithner) helped increase speculation that the dollar may fall more where it is warranted (in Asia) and less in the western world.
Also helping at the margin was Geithner’s comments that the Treasury will not deploy unused TARP funds, which will trim billions from the trillion dollar-plus deficit. Hey, its a start.
Also helping the buck was the reminder that banks across continental Europe have done less work to raise capital than big banks in the US and UK, which have undergone very public examinations by regulators and have raised funds accordingly. Europe still lags badly in that process, and there are fears that once the ECB removes its life support, many will not make it on their own. WestLB’s latest capital injection helped spur those fears.
EUR/USD sits near support in the 1.4840/50 area. 1.4805/10 is the next crucial support zone. Look for more long liquidation on a break.
