Dollar gains capped by equity bargain hunters

The Federal Reserve’s Annual Symposium begins in Jackson Hole, Wyo. today. On Friday Fed Chairman Bernanke will divulge his latest thoughts on the health of the U.S. economy to the crowd. Without thinking, the forex market has concluded ahead of time that the Fed chief will sound dazed and confused by the speed at which the economy has turned down. After all it was merely three months ago that the discussion around the table at the FOMC focused on stimulus exit strategies.

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U.S. Dollar – Any sense that Mr. Bernanke’s perspective remains muddled might further underpin the revival in demand for the safety of the dollar. Yet on the other hand a clearly laid out explanation of the Fed’s actions and a sense of understanding of the extent of the slowdown might help alleviate market stresses and exert downwards pressure on the greenback. After Thursday’s initial claims data the dollar index stands lower on the day at 83.00. A midweek reversal in the path of major U.S. equity indices has caused a snap in the two-day decline around the world with Asian bourses heading higher as investors feel that the fall has gone far enough to start nibbling at stocks once again. Weekly job losses through last weekend of 473,000 was lower than predicted and a welcome reversal from the revised 504,000 of the prior week. That data was largely responsible for the latest 500-point slump in the Dow industrials average index.

Japanese yen – The Nikkei rose overnight and a generally firmer tone to regional stock markets helped stem demand for the Japanese yen as investors reached gently for riskier assets. Ongoing hopes that the government will deliver on yen intervention also continued to depress the yen, which eased to ¥107.45 against the euro. The yen remains unchanged against the dollar at ¥84.69. Prime Minister Kan offered business leaders a ray of sunshine by stating that intervention is, after all, an option open to the government. However, he also has to consider just how much the nation can achieve on its own. This account from Nikkei news leaves some necessary interpretation since it’s unclear whether Mr. Kan is referring to unilateral intervention or simply means that such a path has to be considered in the context of other measures. The Asahi newspaper for example reported today, without offering its source, that the government will ask the central bank to further ease monetary policy as part of an additional stimulus package.

Euro – The euro rebounded to $1.2746 earlier as the risk tone improved. However, it has faltered following the initial claims data to stand at $1.2667.

British pound – The pound rampaged to $1.5589 for its strongest ascent in two weeks following data that provoked relief about the health of the consumer. The CBI August retail sales survey defied expectations of ailing consumer health as the index reading of 35 improved on a July data-point of 33. Analysts had been on the look out for deterioration to 18 but optimistic retailers reported sales growth rather than declines. Earlier in the week the pound had fallen to $1.5375 as investors fretted over looming economic slowdown as government spending cuts and higher sales taxes loom. The pound gave back some of its earlier gains this morning and stands at $1.5522.

Aussie dollar – At its worst point of the week (so far) the Aussie unit slipped to 87.75 U.S. cents. As investors got their acts together overnight the currency has pulled its socks up and remains higher on the day standing at 88.80 cents. The Aussie even shrugged off an unexpected decline in capital expenditure in the second quarter as shown by the release earlier of a 4% drop in private capital expenditure. The currency also rose against the yen as regional sentiment improved with the Aussie today buying ¥75.16.

Canadian dollar – Things appear brighter, although not that much better, for the Canadian dollar whose economic tie to the health of the United States economy has helped drag it down rapidly recently. The loonie buys about one-third of a U.S. cent more today at 94.60 cents. The lowest point of the week was reached yesterday at 93.70 cents.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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