Hi the markets seem to have hit some “clear air turbulence” sooner than i thought with the Dow crashing almost 400 points on Friday. Asia, London and Europe have duly followed. The reason for the fall has been given as a combination of poor profit warnings by Caterpillar because they fear a recession (strange given the weak dollar which we have been told unlikely to strengthen in the near future) and the anniversay of Black Monday 20 years ago when the Dow fell 23% – the equivalent of 3000 points today!! The dollar also collaborated by continuing to fall.
This anniversary also coincided with the G7 meeting which turned out to be a bit of a damp squib. Two pieces of news: first the US mantra that a strong dollar was in everyone’s interest was repeated and, second that the yuan has to strengthen.
Given the above one would have been tempted to continue to sell the dollar. However, perhaps the markets have taken Mr Paulson’s words at face value as both the euro and pound have reversed quite dramatically this morning. It is difficult to judge whether this marks a decisive turning point. However, as both the euro and pound started falling against the yen on Friday (before any announcements) we may be seeing something of significance. Both the euro/yen and pound/yen crosses usually correlate positively to their respective dollar pairs so it is always important to note any divergance.
Having also looked at the weekly charts if this morning’s trend continues we may indeed see a turning point. On the euro dollar it could either end as a bearish engulfing or two bar reversal. The pound dollar is not so clear. However, this cant be confirmed until later in the week.
Perhaps Mr Paulson will finally get his wish!