Early in the week dollar weakness marked by the lowest value for the dollar index in at least one year seems to have been resigned to irrelevance today. The euro’s earlier one-year high against the dollar has lost its significance as the broader market has turned in favor of dollar strength. The latest catalyst was a sour durable goods report, which has helped fuel risk aversion trades and completed a reversal in the dollar’s trading pattern this week.
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The midweek run on the dollar gave recovery bulls plenty to talk about, but the fact that emerging currencies are back in decline having benefited from the view that risk appetite was set to escalate ends a curious week. Weakness in the British pound is a bigger story than weakness in the dollar with sterling possibly set to close below $1.60 against the dollar for the first time in close to four months. A thumbs-up from the head of the Bank of England and now the Prime Minister at the merits to the export sector from a lower currency has provided investors a new theme to trade off.
Investors’ dollar preference is built on the growing connection between the collective words of warning from G20 members and central bankers whose voices are being heard by investors who are starting to see the rocky nature of recovery as has been predicted.
The Japanese yen traded at its worst price against the dollar on Monday at ¥92.53 yet it was on Friday that its spirit was revitalized lifting it as high as ¥89.97, the strongest since February. Sterling has fallen from ¥150.50 to ¥144 as the weekend draws near. The Japanese currency received a boost after further clarity on what the new administration wants.
Finance minister Hirohisa Fujii affirmed that he has no will for the authorities to intervene on the yen. Investors are starting to conclude that the path of least resistance for the Japanese unit is upon and so today’s weakness in U.S. durable goods orders just nudged the yen higher against 16 major currencies. In that sense, investors drove the yen higher buying into risk aversion with the words of Mr. Fujii providing the perfect green light.
The decline in durable goods orders in August was unexpected and it reverses half of the 4.8% advance seen in July. The Mexican peso suffered on this news and like some other victims traded at the far end of the trading range compared to Monday’s 13.2247 to the dollar. Following a decline in crude oil prices, on which the government is reliant for tax revenue, the peso looked unwell in light of the U.S. data given the exposure of Mexico’s export sector to its neighbor.
The Aussie and Canadian dollars followed a similar pattern although their high-watermarks were created midweek to coincide with the plunge in the value of the dollar. Rising commodity prices at that time have since reversed and these commodity-rich nations are feeling the headwinds on the currency front as the week ends. The Aussie is largely unchanged at 86.55 U.S. cents having reached 87.89 cents midweek. The Canadian dollar buys 91.76 cents and so sharply lower than the 93.79 cents achieved earlier in the week.
Next week brings the U.S. employment report, which will provide the latest installment in the discussion on global recovery.
Andrew Wilkinson is a senior market analyst at Interactive Brokers.