The cheapening of the dollar took another step forward overnight as the dollar index fell to its lowest since the start of this year. Investors appear to be rather tetchy ahead of a brace of price reports likely to show dissipating inflationary pressures faced by both producers and consumers. Last month the Federal Reserve gave investors the heads-up on price weakness and offered the solution of further quantitative easing that might further stimulate final demand. Today the Australian and Canadian dollars were trading back at near parity with the dollar while the euro reached a nine-month high. The Japanese yen, meanwhile, traded at its strongest point against the greenback in 15-years as investors across the board stepped over several confrontational lines in the sand.
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U.S. Dollar – In less than 30 days, the advance of the euro has seen it add more than 11 cents against the dollar. That shift is far from subtle and would add $55 per night to the bill of an American tourist renting a $500 per night hotel room. The British pound has risen by seven cents while the Aussie and Swiss franc have both risen by six-and-a-half cents at the same time, while the more reserved Canadian dollar has added three cents. On Thursday, investors face two key reports. Initial jobless claims are expected to remain unchanged at 454,000 and would signal a same old moribund state of economic wellbeing. Prices paid to producers last month are expected to have cooled again leaving price pressures muted. On Friday, the consumer price index is released and again it’s likely that pressures have dipped towards virtually zero. The more that broad price pressures show signs of heading to below zero, the more worried investors are about the magnitude of what the FOMC will be forced to do. The larger the package when it comes, the more worried investors are about the impact on future prices sharing concerns equally over a spiraling budget deficit. The dollar index has shed 0.9% ahead of Thursday’s data to 76.41.
Euro – The sour tone for the dollar provided rationale for investors to continue the switch from dollars to euros. The market was void of any meaningful economic reports today and continues to run on vapor, which helped lift the euro back above $1.41 for the first time since January. The intraday peak of $1.4122 according to Interactive Brokers data compares to a current price of $1.4092.
British pound – The pound remains caught in an interesting dilemma. The unrequited limelight remains firmly fixed on the dollar where the likely volume of further policy relaxation is likely to be the largest given the sheer size of the American economy. But the Bank of England is likely to follow suit despite the fact that inflation has now exceeded the official policy ceiling of 3% for seven months in a row. Unlike that of the U.S., the British government is taking budget control rather seriously in progress austerity measures are likely to weigh heavily on the ability of the economy to weather the storm. MPC member Adam Posen warned Germany’s Handelsblatt newspaper that more monetary stimulus is required around the world and that governments should be cautious about reducing deficits. However, colleague Andrew Sentance has been arguing for higher interest rates for three months on account of inflationary pressures and indeed warned yesterday that failure to act soon would run the risk of a loss of credibility at the central bank. Still, it’s hard to see how weaker economic activity ahead will permit inflation to remain as high. The pound rose against the dollar to $1.6061 while eased against the euro, which today buys 87.93 pence.
Japanese yen – Asian stock indices continued to rally as investors reiterated their view that regional growth will continue unchallenged by that of the world’s major developed economies. Dollar weakness remained the core theme and the yen continued its appreciation, which according to Interactive Brokers data saw the yen rise to as high as ¥80.89 overnight. There appeared to be substantial stop-loss buying given the significance of the break to a price not seen since 1995. The yen has since eased to ¥81.20 and there were no signs of further unilateral Bank of Japan intervention overnight.
Aussie dollar – The Aussie rode the greenback’s weakness hard once again and the local dollar was inspired by a reading of consumer inflation expectations that appears to put the official 2-3% inflation range set by the RBA out of reach. The 3.8% reading of consumer price expectations from the Melbourne Institute for Social and Economic Research is unwelcome news for the central bank but for now having raised rates to 4.5% it can possibly be glossed over while the Federal Reserve determines how to stimulate the world’s largest economy.
Canadian dollar – Dealers continue to flock towards the Canadian dollar. Buoyed by rising commodity prices of its major exports, the loonie also finds favor from global central banks and governments as a solid bet. The Canadian government might well be the first amongst G7 governments to return to a balanced budget within five years. The Canadian unit stands at 99.88 U.S. cents having peered through parity earlier to reach $1.0005 cents. The unit has taken just about six months to cross its own little line in the sand against the greenback.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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