Dollar in a bind

The dollar is sure to one day snapback against the current death spiral it finds itself in. A Fitch Ratings boost to this year’s GDP forecast for both the U.K. and the Eurozone has accentuated the disparate growth rates across the Atlantic divide. Weighing heavily on the dollar is the specter of a fresh round of quantitative easing and until it becomes crystal clear precisely what the full amount and its pace is likely to be, dealers will continue to show the dollar the door.

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U.S. Dollar – For now there are no signs of a dollar snapback and the additional boost of 0.5% to both British and euro area growth from Fitch is another blow for the greenback leading it to its lowest in seven months. Debate is likely to be fierce among FOMC members, none of whom can know with any certainty the impact of another round of bond purchases on the economy. Cleveland Fed member Sandra Pianalto yesterday warned that the present level of growth is insufficient to lead inflation back to around a 2% range nor reduce the rate of unemployment. The difficulty facing investors is translating a second wave of easing into a tangible result. If the result of wave one is what we see now, then should the Fed bother with wave two? Already a member has said that without a reduction in unemployment, let’s not bother. The dollar index remains trapped in a downward spiral until the debate reinforces less QE ahead than the market perceives. The market faces fresh hurdles data wise today in the form of the University of Michigan consumer confidence index and the ISM manufacturing survey, both of which are expected to go into reverse.

Euro – The August unemployment rate was unchanged at 10.1% although the July data was revised up a notch. Meanwhile the better economic news for the 16-nation euro area continued to build with the release of the PMI manufacturing survey, which heralded a minor increase in the pace of expansion. The index ticked up marginally to read 53.7 indicating that factories continue to expand at a healthy clip. The euro reached $1.3764 and has not traded so high since March 17. What’s kicking many traders is the relative appreciation of the single currency in response to the dollar’s woes at a time when peripheral nations in Europe continue to struggle under mounting fiscal deficits and shaky financial institutions.

British pound – The Fitch upgrade for this year’s growth rate to 1.7% was about the only positive factor for the pound today. That is unless you count the dollar’s woes as a sterling positive. The pound hit an intraday peak at $1.5873 yet remains below the weekly highs. The U.K. PMI manufacturing survey slipped just a little to 53.4 while the dip would have been more had it not been for a downward revision to last month’s pace of expansion. In other data consumers continued to pay down their mortgages according to a report showing a sharp drop in mortgage equity withdrawal. Indeed the numbers continued to show net inflows rather than equity drawdowns, which remains a negative factor for consumption.

Japanese yen –Even though the dollar’s weakness meant a slide versus the euro, the yen didn’t manage the same force in its rally against the greenback. The yen couldn’t strengthen past ¥83.16 and so only matched Thursday’s strength. Dealers remain on tenterhooks in the event of a further Bank of Japan battle. Today in parliament Prime Minister Naoto Kan promised to reach out to other political parties to gather their support for a fresh economic stimulus bill to combat the rising yen. Talk on the street says the plan would be as large as ¥4.6 trillion ($55 billion). The yen lost ground to the euro, which rose to buy ¥114.22.

Aussie dollar – A Chinese PMI survey sparked renewed optimism over the health of Asian economies and helped boost the Australian dollar to 97.25 U.S. cents. As Aussie’s major export partner the health of China matters significantly and so the firm resumption of manufacturing expansion is a big deal for the Aussie dollar. The PMI rose from 51.7 to 53.8 in September across China and has provided a positive backdrop to fourth quarter trading. The AiG performance of manufacturing index in Australia, however, dipped into contraction territory at 47.3 from 51.7. But so long as China and India return to growth, the local Australian economy is sure to follow.

Canadian dollar – Bank of Canada Governor Mark Carney sounded quite dovish in his words yesterday and has helped allay fears that the central bank won’t accelerate its exercise in monetary reduction measures. In admitting that domestic growth slowed by more than was expected, Mr. Carney is immediately clutching a get-out-of-jail-free card for this month’s policy meeting. He noted that as a result of the “unusual uncertainty” the outlook warrants a cautious approach. The local dollar jumped this morning to stand at 97.32 U.S. cents as the greenback feels the impact of a further pelting with rotten eggs.

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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