Dollar under attack on multiple fronts

Signs that Europe is in less need of a further round of quantitative easing sparked a rally for the euro and pound, while shattering the potential for a rebound in the dollar. Changes in the Bank of Japan’s operations also appear to have failed to stem a flight into the rising yen once again leaving the dollar at its mercy.

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Euro – Following a gentle slide on Monday, the euro rallied from $1.3650 after a pair of Eurozone PMI reports for September showed economic activity in the area was gaining traction. The PMI Services and Composite readings for last month both rose to 54.1 with individual readings for Germany rising by a greater amount, while the French reading dipped slightly but maintaining a far stronger pace of expansion than in any other Eurozone nation. Investors are clearly far more motivated to own the euro than the dollar with lesser prospects for further quantitative easing in the background. A separate report showing retail sales dipped during August across the Eurozone was largely overlooked in the context of today’s survey data. The euro rallied against the yen where it stands at ¥114.75.

British pound – Another positive surprise for the British economy came in the form of jump in the PMI Services reading for September when analysts had expected a fall. The index rebounded from a slip towards a standstill for the sector and improved to 52.8 from 51.3. The pound shot up from $1.5750 to $1.5914 on the strength of today’s data, which economists reckon now reduces the likelihood of further quantitative easing. Last week MPC member Adam Posen launched further interest in that notion by proposing a debate on the issue.

U.S. Dollar – The dollar soured at the hands of a double-fisted assault from the European duo and the index appears to be on the verge of further decline. The dollar faces its own services PMI index reading later this morning. Fed Chairman Bernanke made remarks overnight to defend previous rounds of bond purchases and said that there is a role for more bond buying to help revive the economy.

Japanese yen –The Bank of Japan maintained its benchmark interest rate but reduced its target lending range to between zero and 0.1% at today’s policy meeting. It also announced the launch of a ¥5 trillion ($60 billion) fund to be used for buying government paper and other assets that would stimulate the economy. The expansion of the balance sheet is in addition to a target monthly purchase amount of ¥1.8 trillion and a credit program of some ¥30 trillion. In addition, the central bank has attempted to sour dealers’ appetite for the yen by proving that it is willing to intervene and weaken its currency. So far it has performed this task on a single occasion and on a unilateral basis. Following today’s policy announcement the yen slumped against the dollar and fell to ¥84.00 before recovering to ¥83.31.

Aussie dollar – The RBA’s decision to maintain its benchmark interest rate at 4.50% today outsmarted dealers apparently craving a higher yield for the Australian dollar. The failure to budge on account of signs that policy is already biting in the nation’s housing market led to sale of the Aussie unit dragging it all the way back to 95.42 U.S. cents. It later recovered to 96.27 cents but still carries a daily loss of 0.5%.

Canadian dollar – The Canadian dollar could conceivably suffer from its affinity with the commodity-sensitive Aussie unit, but given its narrower yield gap above the greenback, it didn’t suffer much as a result of the Reserve Bank’s inaction. Indeed the loonie appears to be finding the sailing pretty good supported by the tailwinds of a rising price of crude oil, one of the nation’s largest exports. Dealers are less inclined to price in aggressive rate hikes from the Bank of Canada following last week’s warning from Governor Carney that future decisions on monetary policy need to be carefully weighed in light of what’s happening outside the economy.

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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