Dollar slides after G20 pledge

Although Treasury Secretary Tim Geithner failed to persuade fellow finance ministers around the world to adopt a system of targeting current account deficits, he persuaded them sufficiently to pledge avoidance of competitive currency devaluations. The market’s response today is to step-up purchases of riskier assets in the conclusion that a damaging trade war has been sidestepped. The dollar has come under further heavy selling pressure while the officials from Tokyo have the most reason to sit quietly on the sidelines huffing and puffing their discontent as the yen tries for a fresh record beyond its 1995 all-time high.

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U.S. Dollar – The dollar index is lower by 0.6% but fighting back against the consensus view that the G20 pledge is unambiguously dollar-bearish. Investors appear to be wholly convinced that following the agreement, Asian nations won’t resist currency appreciation and the FOMC will now open the floodgates on further quantitative easing.

Aussie dollar – The Aussie reached 99.72 U.S. cents spurred by the appeal of higher yielding currencies and the apparent conclusion suggesting there will be protectionist measures to disrupt trade. The Aussie was also propelled higher following third quarter data showing a sharp acceleration of inflation at the producer level. For the quarter ending September, prices paid to producers accelerated at a 1.3% pace, which was almost three times the market forecast and 1.0% above second quarter data.

British pound – The pound joined in the assault on the dollar, although it is more than half a cent lower than its earlier peak. Investors continue to panic over that the only pressure valve left that might help stimulate the economy. The Cameron coalition has boxed itself in to a tight corner through the admittedly necessary spending cuts aimed at restoring fiscal balance by 2015. The impact on growth is likely to leave a dormant economy at best and investors continue to turn towards the Bank of England for assistance through more bond purchases. Data today showed an 18-month low in mortgage approvals while Rightmove Plc said that the majority of Britons expect house prices to edge lower ahead. The pound weakened per euro to 89.18 pence and currently buys $1.5719.

Japanese yen – The yen remains one of the bigger losers after the G20 pledge. Dollar weakness and a wave of buying of Asian currencies in the hopes they will find their true market-determined values sent the dollar down to ¥80.14 before it rebounded to ¥80.63. This is the weakest the dollar has been in the recent slump and makes the 1995 yen peak at ¥79.75 look almost like a done deal.

Euro – The euro hit $1.4059 earlier but has since recoiled to exactly $1.4000 as the dollar claws its way back into the game. Despite the broad-based dollar weakness, the euro still hasn’t managed to really challenge the $1.4125 mark when ebullience last carried it up to its nine month peak.

Canadian dollar – The Canadian dollar burst through its highest in a week as risk appetite resumed, fed by rising commodity prices as the dollar eased. The loonie rallied to an intraday peak of 98.35 U.S. cents before paring gains to stand at 97.95 U.S. cents.

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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