The reason for this drop in the medium term has been the gradual weakening of

the US economy as it tries to fight the effects of the credit crunch and a

housing slump. Recent Case-Schiller data showed that US house prices fell for

the eighth consecutive month with most of the country’s regions posting

declines. On Thursday, banking stocks suffering their worse fall for years as

US giant Citigroup was battered by analysts down grades. This comes on top of

a recent 57% drop in third quarter profits compared to last year. Citigroup

are now in danger of dropping out of the top 10 US companies by market

capitalisation. Top of the list Exxon Mobil also disappointed with below

estimate earnings despite record oil prices. To cap all this negative data,

former Fed chairman Alan Greenspan went on record as saying that the US trade

gap implied dollar erosion and with an accelerating decline.

Of course the short term reason for the drop in the dollar last week was the

widely expected quarter point cut in interest rates by the FOMC. Notable

however, was the unusually hawkish language that accompanied the statement.

One economist called the wording as “subtle as a sledge hammer" because of

the bold way it indicated that this was the last cut for a while. Hawkish

comments from the MPC combined to send the USD/ GBP exchange rate within

touching distance of $2.09 to the pound.

Equity markets initially greeted the FOMC decision positively, pushing the S&P

500 past last week’s high and the Nasdaq to fresh new highs for 2007. On

Thursday, however all the good work was undone as earnings fears and the

reduced probability of further cuts brought out the sellers in force. The

fall was of the same magnitude as the mauling on the 19th of October which

brought out lots of shock headlines in the mainstream press. This time it was

hardly reported. When the press gets hold of something, it may pay to go the

other way. When the same thing is met with silence it could be time to get

genuinely worried.

Notable announcements next week are UK industrial production figures on

Monday, US Non-farm productivity figures on Wednesday, trade balance numbers

and consumer sentiment data on Friday. In all it looks a data heavy week and

we haven’t even mentioned the MPC and ECB interest rate decisions on

Thursday. The consensus estimate is that both central banks will announce no

change statements, but as ever it is the reading between the lines on the

next decision that will cause the excitement. ECB president Trichet is

speaking after the statement.

Last week’s German PMI figures were well below estimates, which might call

into question the widely held view that the next ECB move will be up.

Friday’s payroll numbers indicated that there may be life in the US economy

yet. The dollar may have further to fall, but perhaps Greenspan’s accelerated

decline may not come to fruition, particularly against the Euro. If the ECB

keep rates on hold over the coming months, or even cuts them, as some now

think they might, then the dollar’s decline could become more measured.

Therefore, a long term trade that picks up on the possibility of a slower

Dollar decline might be attractive. Traders ar BetOnMarkets.com predicts that

a no touch trade on the EUR/ USD with the trigger set to 1.50 over 180 days

pays a 78% return. If the dollar falls only a little bit more, stays still or

strengthens against the Euro then the trade wins. The trade is not without

its risks, but that is reflected in the price.