News that a Korean Bank is “considering” an investment in Lehman Brothers helped rally the Dollar on Friday.  The strong up move erased about half of the Dollar’s loss against a few of the majors, except for the British Pound which made a new low for the year on Friday.
 
The move to buy Lehman Brothers and the rally in the Dollar clearly identified the main cause of the Dollar’s recent weakness.  Since July 15 the market seems to have absorbed the problems at Fannie Mae and Freddie Mac as a government bailout has been accepted as the final solution.  Traders, however, did not know how to handle the Lehman situation.  Since the Fed has already indicated that Lehman was not a Bear Stearns, and not a takeover candidate, the break in the Dollar this week was an indication that the market had been gearing up for the worst – a failure at Lehman.

The news regarding a possible buyout of Lehman gave the Dollar a little breathing room, but the failure to close all of the Forex markets lower for the week, left open the possibility of another sell-off next week.  The key to next week’s direction is to watch Lehman Brothers, not Fannie Mae or Freddie Mac. In other news, Bernanke hurt the Dollar’s rise a little when he stated that he expected slower inflation and a more stable currency.  This statement led traders to believe that the Fed was in no hurry to raise interest rates.  
 
The USD JPY rallied on Friday, but still closed lower for the week.  Japanese investors are still nervous about the stability of the U.S. economy and financial system.  If the Lehman deal goes through, then look for the USD JPY to take out the recent high at 110.65.  If the deal fails, this market could drop quickly to 107.21.
 
The GBP USD dropped sharply lower on Friday and finished the week by posting a new low for the year.  A report showing a contraction in the economy during the second quarter is an indication that the U.K. is either in or headed toward a recession.  This also indicating that the Bank of England has to consider a rate cut to stimulate the economy.  The weekly chart indicates the possibility of a break to 1.8367.
 
The USD CHF rallied sharply higher on Friday as traders renewed their confidence in the U.S. economy and financial system.  Traders were willing to invest in higher yielding assets as stability seems to have returned to the markets.  Although this pair closed higher for the week, the main top at 1.1042 is still resistance.   A break back under 1.0865 will be the first sign of weakness.  
 
The USD CAD rallied as gold and crude oil sold off after Thursday’s spectacular gains.  These two commodities are key to the Canadian economy so a resumption of the down trend could lead to future weakness in the economy.  The USD CAD closed lower for the week and confirmed the previous week’s reversal top.  This leaves open the possibility of another attempt to rally crude oil and gold next week.  Resistance is 1.0728.  A break through 1.0418 indicates weakness and sets up a further decline to 1.0351.
 
The AUD USD fell on the daily charts and closed just about unchanged on the weekly chart.  Lower commodity prices, especially in gold and wheat, helped drive down this pair. Weaker commodity prices could put pressure on the economy as the Reserve Bank of Australia will be inclined to cut interest rates if the economic slow down continues.  
 
Profit-takers hit the NZD USD on Friday after a seven day rally.  Lower commodity prices gave weak longs an excuse to take profits.  Despite the sell-off on Friday, this pair still closed higher for the week.  The charts indicate that a short-term range of .6823 to .7217 has been created.  This range creates a retracement zone at .7020 to .6874.  This area has to be tested before one can call the market bearish again.  If buyers come in at this zone, then they may launch another leg up.
 

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