Dollar weakens on risk appeal

The dollar has largely been on the defensive overnight following a request of Treasury dealers from the Federal Reserve to offer feedback on what they expect to hear from the FOMC next week. This isn’t an unusual step and the responses will help the monetary committee better estimate how to go about sizing and shaping its ongoing activities. In Asia risk appetite returned after a journal supported by the Peoples Bank of China ran a story indicating stronger growth this year than expected. The euro was on good form following a revival of business confidence.

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U.S. Dollar – Next Wednesday the FOMC will announce its intention to embark on a scheme to buy various assets in the open market starting with an initial round of $500 billion. At least that now appears to be the consensus view. However, the market view at this point stumbles across a cavern of opinion ranging anywhere between $1 trillion and $2 trillion as to where the Fed will stop. The Fed asked its primary dealers to offer feedback on the size and timing of its plan as well as where yields are expected to go as a result of its intervention. The dollar index measuring the worth of the currency against a basket of most common trading partners reversed its midweek gain and stands lower by around 0.6% at 77.67.

Japanese yen – The yen fought back against the dollar’s midweek gains, which saw the Japanese currency print at its lowest in two weeks. The Bank of Japan today left its benchmark interest rate unchanged at 0.1% and maintained the size of its asset purchase plan. It did, however, widen the array of collateral to be included for future purchase by lowering the threshold to include bonds holding a lesser credit rating. The yen rallied to as high as ¥81.22 this morning over investors’ fears that if the FOMC announces a sizeable plan next week it would put the Bank of Japan bank under pressure to expand its own quantitative measures. Those fears were fanned when the Bank said it would reconvene after the Fed makes its announcement next week. The euro/yen rate remained unchanged at ¥112.55.

Aussie dollar – The Aussie rose after a report from the Financial News appeared quoting a researcher at the Chinese Association of Social Sciences as saying that the remedial policy measures aimed at harnessing domestic growth have had limited impact. The paper is published via the Peoples Bank of China and aroused optimism that domestic activity is perhaps stronger than expected. The researcher predicted that the pace of growth will exceed 10% this year. The Aussie rebounded from its lowest level against the dollar in two weeks rising from 96.52 U.S. cents to 97.75 cents. A stronger regional recovery bodes well for Australian mineral producers.

British pound – Two critical pieces of data tugged at the pound today. Last week’s GDP report remains the arbiter of the currency’s health. The current fear is that the Bank of England might be a better central bank by holding off implementing a second wave of easing. This is boosting the appeal of the pound and today lifted it back to $1.5890 against the dollar. A Nationwide housing report showed house prices across the nation fell by almost twice as much as was anticipated, leaving the average cost of a home just 1.4% higher on than last October. The average home cost slumped to its lowest in eight months according to today’s data. Naturally this is bearish report and doesn’t bode well for consumer confidence. However, a retail survey of companies by the CBI trade body was relatively sanguine. But it didn’t show that retail expectations are predicting a calamity over the winter. A balance of sales expectations did admittedly decline for the first time in five months but the report was marginally firmer than hoped for. The euro lost ground against the pound and slipped to 87.09 pence following today’s raft of data.

Euro – Confidence across the Eurozone amongst executives and consumers rose to a three-year high during October and boosted the view that core European growth remains firm. An EC business climate indicator also rose to an 11-month high. The euro recovered from yesterday’s first visit in a week to below $1.3750 and today rose to $1.3871 boosted by a growing assuredness that the prospect of a double-dip recession remains slim even in the face of fiscal austerity in coming quarters.

Canadian dollar – The weaker greenback and the possible spur to commodities demand out of China persuaded investors to once again plump for the Canadian dollar. It rose to 97.48 U.S. cents and continues to fight back against several days of dollar strength.

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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