Dollar mixed heading into G-20

IB FX Brief: Traders torn ahead of G20 statement

The dollar is ending the week in a mixed fashion as dealers consider a more gradual ease from the Federal Reserve at the forthcoming FOMC meeting in two weeks time, which by implication could mean a rethink on the pace of recent dollar weakness. But the nearby challenge seems to be dealing with the outcome of the G20 meeting in South Korea, which could herald a fresh wave of Asian currency appreciation while cheapening the dollar. Treasury Secretary Timothy Geithner hopes to inspire export-oriented nations to pursue internal policies that would nurture domestic demand. His bargaining tool is a reduction of budget deficits in developed nations that would help iron-out the damage to exporting countries when growth turns sour.

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U.S. Dollar – After a promising start in which the index was higher, the dollar suffered a later wave of selling. Nevertheless the index is currently on course for a weekly gain as dealers digest commentary from St. Louis Fed Chief James Bullard. He was the first Fed member to toss a dollar value for quantitative easing into the ring pegging a $100 billion first round that should start next month. This amount is far smaller than most estimates, which range anywhere between five and 10 times this amount and his thoughts have provoked caution among dollar shorts concerned that the larger-scale purchases by the Fed would be bad for the dollar. A cautious approach to quantitative easing might stop the slump in the dollar and prove more palatable to emerging market nations who are struggling under the unaccustomed strain of rising currencies of their own. Secretary Geithner is floating the notion in South Korea that countries reliant on exports who run persistent trade surplus should stimulate demand through fiscal restructuring while tempering an external surplus through an exchange rate policy. Mr. Geithner proposes limiting the size of a surplus in relation to a nation’s GDP over a period of years. Deficit nations should work towards fiscal reform to reduce their budget deficits so as to eliminate the impact on overseas exporters when the economic cycle changes. Such reforms certainly won’t happen over the weekend, but his proposals will provide a valuable forum for debate going forward.

Aussie dollar – The Aussie displayed volatility overnight ranging by a cent and capped at 98.50 U.S. cents. It benefitted from the view that Asian and other surplus trade nations might come away from South Korea stronger. The Aussie currently buys 98.20 cents.

British pound – The pound is on a six-week string of losses against the euro as dealers compare fundamental data coming out of both areas. The commitment to austerity measures in Britain is weighing on the pound, which has slipped per euro to 88.71 pence to end the week. Meanwhile European data continues to surprise to the upside. Against the dollar the pound has rebounded from a second attempt to break below $1.5650 and currently stands at $1.5716. The pound has distinctly faded over the course of the week and has dropped by three cents against the dollar in a week in which the monetary debate swung closer to a second wave of bond purchases. The gravity of the spending cuts was made clear by the British Chancellor during the week resulting in the loss of half-a-million public sector positions in an effort to eradicate a costly budgetary overhang.

Japanese yen – The dollar slipped earlier versus the yen to ¥81.00 before it rebounded to ¥81.25. Chief Cabinet Secretary Yoshito Sengoku told Parliament that there was no official line in the sand at ¥82.00 below which the Ministry of Finance would intervene to curb its strength. He told fellow politicians that the government would continue to monitor the markets in preparation if required to intervene. An index of industrial activity for August fell 0.4% after a 1.1% increase in the previous month.

Euro – Surging German business confidence helped power the euro ahead earlier this morning lifting it to as high as $1.3970 before a bout of dollar optimism saw the single currency swan dive towards $1.3859 according to Interactive Brokers data. The IFO’s October reading of business confidence among Germans surprised analysts by rising to 107.6 continuing a streak of good data.

Canadian dollar – Canadian inflation data was mildly worse than forecast on a headline basis for September with a reading of 0.2% between months lifting the annual rate to 1.9%. However, the Bank of Canada’s adjusted measure, which excludes eight volatile items and eradicates the impact of changes to indirect taxes, took a step back by one-tenth to an annualized reading of 1.5%. According to the central bank who left interest rates static earlier this week, the index will not reach the 2% target rate until 2012.

Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

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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