Dashed hopes for the construction sector in the shape of weak new home sales yesterday seems to be a watershed for the dollar. In very thin market conditions the dollar is giving away some of the strong advances it made throughout the month of December. However, a rise for durable goods sales in November and a decline in the weekly jobless claims data released earlier this morning are arresting the decline in the dollar’s fall. The dollar earlier took its cue from a rally for Asian stock markets and a rise in commodity prices rooted in hopes that the economic recovery might be set to strengthen into 2010. One investment house upped its forecast to a double-digit pace for Chinese growth and predicts strong import led growth, which inherently bolsters global export and trade.
U.S. dollar – The rise in the value of the dollar has largely come at the hands of an improvement in economic data and from the snowballing thought process that the Federal Reserve might act faster to both withdraw its emergency stimulus measures and at least normalize monetary policy. And of course there are other factors affecting the dollar in the background including the likelihood accompaniment of inflation with growth. Traders don’t see the return of one without the other and this mindset has helped accelerate a rally for the dollar.
An interview earlier in the week with St. Louis Fed president James Bullard, undermined the rising psychology behind the dollar’s recent ascent. He indicated to reporters at the WSJ that the Fed will maintain near-zero interest rates throughout 2010 in order to nurture a modest recovery.
Perhaps the dollar’s strong rally doesn’t really fit the less robust recovery picture that the Fed sees for the U.S. economy ahead. Global leaders and central bankers have gone to great pains to dumb down recovery prospects by referring to a “fragile recovery” and a “rocky road ahead.” What has changed is the mindset that the dollar will be a perennial weakling and while that has flushed out plenty of traders who might have mistakenly used the dollar as a funding vehicle to get aboard the carry-trade, others have hopped all over the rally in the hopes that a sharp rise in interest rates is just around the corner.
Euro – The euro rebounded above $1.4400 earlier and currently trades at $1.4384. Germany is already closed for business and it won’t be long before remaining European bourses shut down until early next week when slow trading will gradually resume. The euro also rose against the yen to ¥131.76.
Aussie dollar – The Aussie built on the gains inspired at the release of that watershed new home sales data mentioned above. For much of this month currency traders looked at the prospects ahead rather differently. They drew a fresh line in the sand and asked the question, “which unit will change most when yield curves shift?” And the currency with the greatest potential they concluded was the U.S. dollar. This thought process really made it unfair for the Australian dollar, which was handicapped using a flawed process of looking for potential change. The Aussie already has an overwhelming yield advantage over most currencies given the recent three month tightening cycle just ended by the Reserve Bank. The market now judged no chance of a change in yields near term. However, it assigns a large likelihood that U.S. yields will rise hugely from close to zero percent.
Two things could happen. First the Fed could deliver rate rises and narrow the yield gap and satisfy the dollar bulls at the expense of Australian bears. This is highly unlikely within the next six months, although long yields will very likely continue to rise. Second, investors pursuing this trade will die trying to run a large yield differential in the face of a strengthening export-led Australian recovery. Today the Aussie rose to 88.18 U.S. cents.
Japanese yen –A strong Asian session for stocks was again helped by yen weakness given the kick it provides to exporters’ prospects. Allegedly exporters were seen buying the yen as they repatriate yen ahead of year end. The dollar today buys ¥91.62.
British pound – The pound simply couldn’t make it through the party today and despite a fourth day of stock market gains on improving sentiment shored up by an earlier in the week trade report predicting stronger growth in 2010. Right now at $1.5952 the pound seems to be bowing out of the party prematurely ahead of the long weekend.
Canadian dollar – The loonie is back to flat on the day after an earlier strong run. Comments supporting the Canadian dollar this week came from finance minister Jim Flaherty who seems to have the inside track on forthcoming (or current) Chinese government purchases of the local dollar as a way of diversifying away from the U.S. dollar. The comment echoes the same sentiment made by a Russian central bank official in November regarding the Canadian dollar. Today the Canadian buys 95.40 U.S. cents.
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