- A technical recovery for the Dollar?

- Central banks and the New Year

- Pakistan and the price of oil

The recovery in the dollar since late November and its partial submergence this week were end of the year technical plays. From August to November the dollar lost over 11% against the euro, profit taking on such an exceptional trend was inevitable, especially in December. The dollar fall since last Friday was a reversal triggered by the weak durable goods number on Wednesday. Neither move is predictive of market opinion going into the New Year.

In January the constants will return with the state of the American economy and its reflection in Federal Reserve policy paramount, and developments in Europe and the ECB a close second. The primary focus on the US is simply because Fed policy and its next rate decision is undetermined. Ben Bernanke, the Chairman of the Fed would probably like to leave rates at 4.25% at the January 31st meeting. The financial and business communities would passionately like another rate reduction. The run up to the meeting will provide plenty of room for speculation.

The ECB meeting on January 10th will not generate nearly as much interest because the governors have so much less operational room. Inflation has been well over the 2.0% since September and is not likely to subside in the near term. But the ECB’s corporate desire to fulfill its inflation mandate is constrained both by the unresolved financial and credit market debacle and the faltering European economies. Both banks will probably have to rein in their better instincts when they make their January decisions; the Fed will likely cut 25 basis points, the ECB will remain on hold.

For a market primed for better news after last week’s strong retail sales figures, the US durable goods figures were a major disappointment. The dollar slid more than 100 points against the euro in the aftermath. The numbers hit the market at almost exactly the same time as the news of the assassination of Pakistani politician and presidential candidate Benazir Bhutto. An increase in tension in Pakistan and by proxy the oil producing regions of the Middle East should damage the United States economy less than the EMU, the States are far less dependant on Middle Eastern oil than Europe, but with the market already moving against the dollar there was no change in attitude. What transpires in the next few weeks in Pakistan will determine the overall market reaction but the mechanism will be the price of oil. Pakistan has a nuclear arsenal and the government is under great pressure from Islamic radicals, the presumed assassins of Ms Butto. The more radicals can destabilize the Islamabad government the higher the oil price will rise. If there is ever a change of power in Pakistan the sky may be the limit for oil. The ramifications for the world economy of a forced change in government in Pakistan could be devastating.