Forecasting the US Dollar with the News

10/17/2008 1:11 pm EST

Focus: FOREX

John Jagerson

Co-Founder and Contributor,

I think that traders want to be able to look at the news each day and reach a logical conclusion about the impact that the news should have on market prices. Unfortunately, because news is never released in a vacuum, the real factors pushing a currency can be hard to identify. Today is a great example of this principle. US retail sales were released for the last month of the 3rd quarter and the results were very poor. In fact, the quarter has now officially closed with all three months showing a decline. Logically, a trader would assume that this news is going to hurt the USD; however, that is not what is happening in the market.

I get a lot of e-mails from traders asking about this very problem. If the news is so bad for the US, why isn't there a stronger reaction to the downside on the USD? The answer is difficult to quantify but not too difficult to explain. The real issue is that retail sales are merely one component of the entire news landscape today. For example, in the video, we look at the same retail news report of other currencies. Most of which are not doing any better than the US. The retail report in the US is shocking but is not any more shocking than the same news happening in places like the Euro-zone.

Looking deeper into the news, we can see more important factors like the fact that the Treasury is getting very serious about pushing cash into banks. The reports coming out today make it look like the Treasury is nearly "forcing" money onto banks that need it and those that don't. This means the Treasury is going to have to finance those injections through debt issues. Selling more US debt will likely raise yields on that debt and increase demand for dollars needed to buy it.

The conclusion is that the retail report is actually quite neutral on a relative basis because nearly all the major economies are seeing slow retail sales growth and the real news is that demand for the USD is likely to rise as the Treasury funds its rescue plan. When you read the news, make sure you are reading all of it and keeping in mind that in the currency market—everything is relative.

By John Jagerson, of and

Watch the video now for more information: