After several weeks of building expectations over the depth of what the FOMC might deliver, it seems investors have quickly come to terms with its impact on the value of the U.S. dollar. While most onlookers were quick to conclude that the Fed was deliberately devaluing the dollar, it’s the parlous state of peripheral European state finances that is limiting appetite for Eurozone-based assets. That much is once again exemplified today by surging yields on Irish government debt to a record premium relative to good-old German bunds.
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Euro – It was Thursday morning after portfolio managers and economists had fully digested what the FOMC’s decisions meant that the euro raced up to $1.4282 as the dollar gave way to selling pressure. Despite the growing challenges surrounding Portuguese, Greek and Irish budgetary policies the euro continued to find favor among investors, towed behind the powerful engines of German and French export strength. And despite today’s report for September data showing an increase in demand for German goods from Asia, the euro’s powerful run seems to have come to an end. Grabbing the headlines once again today is the worry that despite the best efforts of the Irish government to bail out its ailing financial sector, the cost will over burden the government forcing it to take EU assistance. Last week the government met to piece together a 2011 budget including spending cuts and tax increases of €6 billion. Weighing on sentiment is the fear that bond futures will in future be called upon to bear the burden of losses on government debt. Germany’s Der Spiegel magazine says the nations’ Finance Minister Walfgang Schaeuble has a plan to do precisely this, which is keeping appetite for Euro-area investments under pressure to start the week. The euro fell to below $1.3900 for the first time in a week.
U.S. Dollar – The cooling off in risk appetite has helped drive the value of the dollar against a basket of currencies back to where it was when the Fed made its move last Wednesday. The index is up 0.6% today to 77.03. The dollar has made its biggest move against the euro but the knock-on loss of appetite for anything risky has seen it rally hard also against commodity dollars.
Aussie dollar – The Aussie eased against the greenback to a little under $1.0100 U.S. cents to start the week, fading after an attempt late in the week to breach $1.0200. There was sparse in the way of hard data to help buoy the Aussie unit save for an ANZ job advertisements index for October. The number of vacant positions rose by 0.6% a little lower than the 1.1% reading of the previous week.
British pound – It seems that the raft of positive data wrapped in the warmth of a glowing GDP report two weeks ago has saved the Bank of England from having to enter the government bond market in an effort to revive lending. Conventional wisdom says that the central bank will not need to weigh its options again until February at the time when its forecasting department delivers the quarterly inflation report. The pound rose to a one month high against the out-of-favor euro and is trading at 86.29 pence per euro. Against the dollar the pound weakened marginally but still trades well up on its October average and is today at $1.6148.
Canadian dollar – A surprise decline in the level of housing starts across Canada causing concerns about the health of the recovery weighed on the local dollar on Monday sending it lower against the greenback to 99.46 U.S. cents. Appetite was already waning for so-called commodity dollars as the U.S. unit rose as fears resurfaced within Europe.
Japanese yen – The yen rose alongside the dollar in light of rising budget tensions within Europe. At this point no one knows whether this is a one-or-two-day phenomenon or whether risk appetite will resume later in the week. For now the yen is broadly higher except against the dollar where it trades at ¥81.17. Against the euro the yen trades at 113.18 while one Australian dollar today buys 82.01 while it’s even higher against the relatively firm pound at ¥131.10.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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