Dollar rallies as risk aversion returns

Investors’ confidence in equity markets has come a long way since the late summer doldrums saw indices plunge. The prospect of further easing via quantitative policy has spurred such confidence so as to alleviate the likelihood of a double-dip recession. But by the same token, confidence in the dollar soured as investors bet that it would be the biggest loser from a global recovery. However, an initiative by Chinese authorities once again smacks of engineering a move to a more sustainable cooling-off period for its economy. Today the dollar is suddenly back in vogue as risk aversion rears its head.

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U.S. Dollar – Late in the week, the dollar weakened to above $1.40 for the first time in eight months as investors pondered the view that Europe’s economic recovery might be self-sustaining and certainly at a far lower fiscal cost than was emerging for the world’s largest economy. Not since February had the euro been worth as much against the dollar. As investors pondered the scope of a further round of quantitative easing, they ditched the dollar for fear of a currency debasement, which might yet trickle through to the rest of the world, in marginally less need of such stimulus. The dollar index is recovering this morning after the march into equities came to a thumping halt after China raised the reserve ratio requirement across six banks, essentially restraining them from the amount they can lend. The measure has dampened the appetite for risk for now and is being taken as a dollar and yen positive. The index last traded at 77.65 for a gain of 0.2% on Tuesday. This afternoon the market will learn better insight into the FOMC’s thought process when the minutes from the Sept. 21 meeting are published today. Much of the dollar’s recent devaluation lies at the hands of uncertainty over the amount and timing of more bond purchases by the Fed.

Euro – After a bullish start to the week above $1.4010, the euro has done nothing but recede since and earlier reached a low at $1.3775 according to Interactive Brokers data. German CPI data came out in line with market forecasts at a still tepid rate and predicted nothing other than a neutral posture for monetary policy.

British pound – In a moment of abject dollar weakness, late last week the British pound surged back over $1.60 at one point, but like its European counterpart is today regretting that excess. The pound weakened to below $1.58 at one point after comments from MPC member David Miles stating that the central bank may indeed yet resort to the useful quantitative easing tool. The pound remains weaker on the session at $1.5845 and is also lower per euro at 87.32 pence. For a seventh consecutive month the government revealed an inflation rate above the mandated policy range at 3.1%.

Japanese yen –There were no further signs of intervention despite the yen’s ascent to a 15-year high per dollar. Finance Minister Noda told reporters that he remains prepared to take drastic measures to reign in the strength of the currency including further rounds of intervention. He told international finance ministers at the weekend that the recent intervention undertaken by the Bank of Japan was due to the unwarranted level of the yen in the context of its domestic recovery. The yen remained firmer than the dollar at ¥81.86 in light of the Chinese effort to restrain lending. The yen also rose to its highest per euro this month and currently stands at ¥113.28.

Aussie dollar – The Aussie shrank after the Chinese initiative was revealed and fell against the dollar to 97.67 U.S. cents. On Thursday as the dollar stumbled the Aussie had jumped as high as 99.17 according to Interactive Brokers data.

Canadian dollar – The Canadian dollar continues to trade sideways and remains stable against the U.S. dollar at 98.62 U.S. cents. The prospect of efforts to stimulate the economy of Canada’s biggest trading partner along with a decline in the value of the greenback has helped provide a positive backdrop for the Canadian dollar. Investors have also scaled back the likelihood of further interest rate increases from the Canadian central bank after data last week revealed a weakening construction sector and a net loss of jobs during September.

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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