Dollar tumbles out of bed

A slump in the dollar this morning seems largely confined to a gain for the single European unit. The British pound has nevertheless made gains against the greenback despite a further sign of impending slowdown. Few dealers appear to want to be the first to prod the Bank of Japan into a second wave of intervention. According to further analysis in the aftermath of Wednesday’s initial round of yen sales, the central bank sold far more yen than was initially realized at the time.

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U.S. Dollar – There appears to be no obvious catalyst to a 0.4% slide in the value of the dollar index at present. Gold and the euro have both surged at the same time while the response across other majors is muted. There are two relative data points due for release on Thursday starting with initial unemployment insurance claims. The predicted decline of 4,000 to 451,000 would actually be good news for the dollar. Later in the morning the Philly Fed manufacturing index is forecast to depict a slower pace of factory activity in the region.

Euro – The euro’s surge is something of a mystery at this point in time. It had a positive tone over several hours in the European session and by 7am in Manhattan kicked the dollar out of bed forcing it to $1.3109. That’s the highest the euro has been since August 11. The Eurozone earlier reported that the trade surplus grew last month as imports dropped at a faster pace than did exports.

Japanese yen – The Bank of Japan reported a surge in deposits held by financial institutions by enough to suggest that midweek currency sales totaled ¥2 trillion ($23.4 billion). Banks likely hit by sales at the central bank were today talking larger numbers than yesterday’s initial suggestion of a couple of hundred billion yen. The larger volume of yen sales seems to have nurtured a new found respect for the Bank of Japan as the clinical and well-timed nature of its actions appears to have achieved a goal. The precise nature of the goal, however, remains unclear. Is the central bank trying to guide the yen lower or is it trying to stop its ascent? Investors did attempt to force the yen higher overnight when it reached ¥85.25. Dealers suspect that opportunist exporters were trying to repatriate yen at its weakest in several weeks ahead of the forthcoming end of the first half of the fiscal year. The yen has subsequently weakened to ¥85.70 per dollar while per euro the yen eased to ¥112.05.

British pound – Although the pound remains lower at $1.5611, a failing dollar is masking the performance of the British unit. A horrible retail sales report for August earlier sent the pound briefly to a session low of $1.5538 on deepening worries that the economy is unlikely to be able to stave off a further slowdown. Simply put, weakness in consumption was not expected at this stage of the game. A monthly drop of 0.5% in sales since July was compounded by an ugly downwards revision to the previous month’s data. The result is that the predicted annualized pace of gains in retail sales turned out to be a mere 0.4% rather than the 1.9% expected. I suspect that if the dollar was not nursing a bruise on the head this morning, the pound would be in far worse shape. The pound did lose out to a resurgent euro, which today buys 83.82 pence.

Aussie dollar – Just to prove that the U.S. dollar’s weakness doesn’t appear associated with a risk rally, the Aussie remains lower overnight. And that was despite reports of a bullish tone to words from the RBA’s Assistant Governor Philip Lowe who said that the economy was growing at close to full speed and that would help continue to push the rate of unemployment back to full employment. The Aussie nevertheless slipped and is trading at 93.67 U.S. cents and remains weaker against the yen where it buys ¥80.23.

Canadian dollar – The Canadian dollar remains range bound and has barely budged against the U.S. unit where it currently buys 97.27 U.S. cents. Dealers were unnerved yesterday following a weaker than hoped for manufacturing report indicating export market weakness.

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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