Several factors have recently contributed to a weakening of the dollar including a step-up in investors’ risk appetite. The recent bout of Japanese intervention aimed at loosening the yen’s stranglehold on the domestic economy is part and parcel of such factors and has encouraged a broader rally across riskier assets including high yield and more volatile currencies. Ahead of the one-day FOMC meeting today investors are cautiously favoring the dollar unsure of what the Fed might say or do in its last meeting before November elections. Heading into this afternoon’s statement, the surge in investor sentiment is evident in a huge rally in global stock markets over recent weeks and hardly argues that the Fed will need to change its stance just now. The last time the Fed dared to wave a red flag, its words of warning rattled markets setting off a nasty bout of bearishness.
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Japanese yen – The dollar pared its recent advance against the yen overnight. The absence of the Bank of Japan at current levels has been taken as a sign that the line in the sand stands at around ¥83.00 and that the authorities will act to defend rather than to attack. The silence of its policy action has been taken after almost a week as a sign that it doesn’t seek to set the yen off on a weakening trajectory. The market might now start gently pushing back to see if the original battle line remains intact or is somewhat nearer. Former top currency official Sakakibara warned that intervention is useless and claimed today that record highs for the yen were simply a “matter of time.” The yen strengthened to ¥85.27 in earlier trading as the battle of wits begins once again.
U.S. Dollar – The dollar index remains pressured by the advances of yen and euro, although the picture is admittedly mixed. Earlier this morning, data showed an improvement in construction activity during August. A 10.5% monthly gain for housing starts brought the annualized number of housing starts to 598,000 from a downwardly revised reading of 541,000. Building permits issued during the month indicating likely future home building activity also outpaced its forecast rising by 1.8% to an outright level of 569,000.
British pound – Deterioration in British public finances raised fresh concerns that the already onerous round of spending cuts might worsen and cause the pound to decline to its weakest point in four days against the dollar. The pound slid to $1.5504 following news that net public sector borrowing rose to £15.3 billion making it the largest deficit for the month of August since records began in 1993. The pound also slid versus the euro, which rose to buy 84.37 pence. The August deficit outpaced last year’s requirement and was larger than an expected figure of £12.5 billion.
Euro – Irish and Spanish government debt auctions went off without a hitch, at least temporarily allaying fears over threats to the longer-term health of the European currency unit. The euro subsequently added 0.5% against the dollar to $1.3126 rising briefly at its best to $1.3150. The euro also made a minor gain against the broadly stronger yen to stand at ¥112.10.
Aussie dollar – Dealers are left asking what potential there is for another rise in Australian interest rates after minutes from the September 7 meeting were released earlier today. The RBA stated that “at some point in time” further monetary policy tightening would be required in the event that its central scenario for growth panned out as expected. And since the economy could conceivably grow for several years at trend and above the odds of further monetary tightening look pretty high all of a sudden. Two weeks ago the RBA chose to leave policy alone given the stressed out state of the U.S. consumer and the uphill struggle facing several European nations in remedying their fiscal ailments. Today the Aussie continues to pound higher challenging two-year peaks by the session standing at 94.91 U.S. cents.
Canadian dollar – Tepid consumer price inflation data detracted from the value of the Canadian dollar this morning causing it to quickly shed weight against the greenback. The Canadian unit slipped to 96.60 U.S. cents after government statistics showed a 0.1% dip in the monthly price index facing consumers during August. The previous month saw prices add 0.5%. Year-over-year the pace of inflation lessened from 1.8% to 1.7% causing investors to feel less pessimistic about prospects for further interest rate increases. Three rate increases since June have lifted the short-term cost of borrowing to 1% and naturally investors watching anemic growth to the south of Canada are left wondering how much more might be needed if U.S. monetary policy is likely to remain static for as far as the eye can see.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLCNote: 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.