Dollar hindered on disparate views of QE2

The debate over the need for further quantitative easing continues to grab headlines. Into the cauldron go the views of the Boston Fed’s Rosengren, those of Philadelphia’s Plosser with those of Bank of England member Adam Posen on the other side of the Atlantic thrown into the mix. The uncertainty is killing the dollar while today’s potentially bad news for Spain and Ireland merely melted into the cauldron causing earlier weakness in the single currency to evaporate. Dollar longs staring into the cauldron don’t like the recipe they see bubbling below the surface thinking it can only taste about as good as a cup of cod liver oil.

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U.S. Dollar – The fresh daily lows for the index continue at the end of the quarter and ahead of the Chicago PMI due later this morning, which is due to show the weakest pace of expansion in 10 months. The dollar is lower against all 16 major currencies this morning as its drubbing continues. The message from Federal Reserve members is mixed and Chairman Bernanke appears to face quite a challenge in drawing consensus at the November FOMC meeting. Boston Fed’s Rosengren yesterday said that the central bank must adapt to challenges in the real economy “vigorously, creatively and persistently.” Charles Plosser warned that the FOMC needs to consider losing credibility by adopting a fresh bond purchase plan if it failed to reduce strains within the labor market.

Euro – Turmoil continued in Europe today, but the euro shrugged off the news courtesy of the spotlight glaring on the U.S. economy. Moody’s did downgrade the debt rating of Spain by a single notch and moved the outlook to stable. The Irish government delivered a deeper provision for its banking system as it made conservative estimates on the nation’s capital needs for Anglo Irish and Allied Irish banks. Its move seems to be an effort to draw a line in the sand beneath the problem in the hope it can quell speculation about what the final tally for an over extended financial sector will be. The euro has since recovered from a visit to a daily low at $1.3559 and is back towards the day’s peak at $1.3675. At this rate it will have gained 10.2% versus the dollar during the third quarter.

British pound – The pound hit $1.5923 after an unexpected rise in the Nationwide house price index for September. Home values improved 0.1% on August leaving them 3.1% higher year-on-year. The data is a good excuse for the pound to rally rather than depicting any change in the underlying weakness of the housing market. Also providing the pound with a boost today was an interview in the Yorkshire Post in which MPC member Adam Posen said that the resumption of quantitative easing was a matter for the MPC to decide and that the committee may yet talk him out of such a move. Yesterday, Mr. Posen argued in favor of further bond purchases to shock the economy from its rut. The euro has taken back earlier gains made by the pound with the euro today buying 86.33 pence.

Japanese yen –Yen daredevils pushed the envelope into the realm of the Ministry of Finance overnight pushing the unit to its highest since the Bank of Japan intervened. Figures released today showed the central banks sold ¥2.2 trillion and bought $25 billion in the four weeks ending September 28. Today the yen rallied to ¥83.16 and not at all far from its weakest point of ¥82.77 low on September 14 triggering the authorities to act. Data showed industrial production for the month of August dropped at a time when analysts were expecting a rise. The 0.3% dip between months left the annual rate of change at 13.4%. A Nomura JMMA manufacturing PMI reading of 4.5 indicated a return to contraction for the sector after 50.1 the previous month. On a more optimistic note, retail sales rose 1.4% on the month leaving the annualized change at 4.3%. The yen also gained against the euro to ¥113.73.

Aussie dollar – The Aussie faced earlier weakness after the government reported an unexpected slide in the number of building approvals during August. The number of permits granted to build or renovate houses and apartments dropped 4.7% indicating unexpected weakness in the health of the construction sector. Analysts had expected no change in the reading. The Aussie immediately slumped to a two-day low at 96.59 U.S. cents before risk appetite returned in the New York morning. The unit has since rallied to 97.17 cents.

Canadian dollar – The chances of an October rate increase from the Bank of Canada have now halved to 20% in the past week affected by the impact of a weaker United States economy. The government released the monthly GDP reading for July, which as forecast declined by 0.1% making for the first monthly decline in 11 months. However, with marginally improved data out of the U.S. in the shape of a positive revision to second quarter growth and declining initial claims, the Canadian dollar was able to rally sharply rising to 97.53 U.S. 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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