From Iran Missiles to Merrill Downgrade, Not Much Good News for Dollar

July 9, 2008

There is simply no direction in the financial markets, especially the currency markets, in the absence of major US economic data releases. Major currency pairs such as EUR/USD, USD/CHF and USD/JPY have been moving more or less sideways since Monday with the US dollar on the stronger side, but today the US currency is looking a bit vulnerable as US stocks dip into the red after Tuesday’s “rally”, and on news that Iran has test fired long and medium range missiles, capable of reaching Israel. The world - and the US dollar - doesn’t really need a combination of Middle East tensions and high oil prices to feel more skittish. Traders are still not willing to go long on the dollar as the latter is still haunted by the possibility of more turmoil in the US financial sector.

Today Fitch announced that it has placed its A+ rating of Merrill Lynch (MER) on Rating Watch Negative, and said it expects Merrill to have another loss in Q2 due to ongoing writedowns, mainly those associated with residential mortgage, bond insurance and ABS-CDO positions. Merrill Lynch is due to report its earnings next week.

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