Hurricane Katrina and
the US Markets

With the US markets back online following yesterday's holiday, the dollar is higher across the board - except against sterling - as the market continues to assess the fallout in the wake of Hurricane Katrina.

The price of crude oil has fallen off its high and is currently trading below $68/barrel as more production facilities in the Gulf of Mexico start to come back up.

The fact that there is very little economic data for the US due out this week (and whatever is released will not take into account the devastation wrought by Katrina) means that the market will be engaged in a heated debate concerning the effects of the storm on the Fed's future interest rate policy.

The most probable scenario is for the Fed to leave rates unchanged at 3.50% into the end of the year, and there is a chance of a rate cut in November or December.

Speeches this week by Chicago Fed President Moskow, San Francisco Fed President Yellen and Philly Fed President Santomero will be closely scrutinized for any hints as to a change in Fed policy following Hurricane Katrina.

The release today of ISM non-manufacturing data for the US will garner some attention, but the results of which should be discounted due to the fact that the effects of Katrina will not be reflected within the numbers. Expectations are for a slight decrease to 60.2 in August from 60.5 in July.

The euro has fallen off its recent high of $1.2580 against the dollar and is back under 1.25, trading at 1.2460-80 following the release of mixed retail sales data for the Eurozone.

Although the Bloomberg retail PMI data for the Eurozone rose to 51.9 in August - its highest level since its introduction in January 2004 - retail sales within the Eurozone came in weaker than expected, dropping 0.5% (M/M) in July compared to a downwardly revised flat reading in June from a previous 0.4% gain.

As the markets continue to debate whether or not the Fed is done tightening monetary policy for the year, there is a strong possibility that the euro will once again regain the 1.25 handle, which is the 50% retracement of the $1.3123-1.1872 rally.

Further resistance is holding at 1.2550, followed by Friday's intra-day high of 1.2587.

If there is any hint from Fed officials this week that the Fed may be done raising rates, the euro could be lifted towards the 1.2612 target. Support starts at 1.2470, backed by 1.2430.