Dollar tone improves as risk-on fervor calms

The euro’s recovery from a near-two month low continued in anticipation of year-end generosity from the ECB. On Thursday the 16-nation central bank left interest rates alone but it won’t be until the press conference later in the day that we find out whether it intends to expand its bond purchase program. Dealers are also hoping that incessant pressure on weaker economies within the Eurozone will force it into a change of heart over a gradual reduction in liquidity as it tries to walk away from emergency measures.

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Euro – Third quarter growth remained robust across the Eurozone in a report released earlier. The economy expanded at a pace of 1.9% on an annualized basis consistent with the performance in the three months to June. Producer prices for October remained elevated and came in slightly above forecast at 4.4% over the year earlier, although this is not adversely impacting consumer prices. Following Tuesday’s slump in the euro to its lowest against the dollar since mid-September, dealers are taking advantage of a near-term bullish technical picture and see little rationale to pound it further into the ground until after hearing what ECB President Jean-Claude Trichet has to say. However, the prospects don’t look especially appealing at present. The run on the euro comes as a result of building pressure on peripheral nations, which investors fully expect to mutate into a larger-scale problem for a bigger economy such as Spain unless the ECB acts differently. But by stepping up its bond purchase program, the ECB would start to look an awful lot like the Fed. The Bank of England appeared chastened just two months ago when fervor surrounding the Fed’s anticipated easing carried sentiment towards more easing in Britain and damaged the pound. Much of the euro’s strength over the summer came as a direct result of looking like a hard and viable alternative to the dollar. That doesn’t seem the case any longer. Ahead of the press conference the euro traded up at $1.3160.

U.S. Dollar – The Fed’s Beige Book was another piece of mildly encouraging news for the economic recovery on Wednesday. The dollar is under a mild amount of pressure as the euro recovers but elsewhere is beating back the fires as it advances against other currency pairs. The dollar index has rebounded from earlier lows and stands at 80.61 this morning. Data-wise the dollar later faces October existing home sales, which are expected to show another weak month with sales down 1%, while initial claims data should be of interest today. Last week’s slide to 407,000 will be watched for revision from a two-year low and is likely to whip up enthusiasm for a big employment number on Friday. Analysts predict a reading of 424,000 first-time claimants through last weekend.

British pound – A PMI construction report again fooled analysts by rising rather than falling for November. The construction sector expanded at a marginally stronger pace for the month with the series rising by 0.3 to 51.6. The call was for a drop towards a reading of 50 indicating unchanged activity in the sector. The pound fell versus the dollar to $1.5562 after earlier hitting a four-day high at $1.5668 according to Interactive Brokers data. Against the euro, the pound remains firm and touched its highest in 10-weeks this morning. The euro has since pared losses to stand at 84.82 pence.

Japanese yen – With little meaningful data to drive activity either way in Japan, it was the continuation of the positive approach to risk appetite that maintained pressure on the yen on Thursday. The dollar surged to ¥84.37 at one point while the euro rose to ¥111.03.

Aussie dollar – The Aussie remains trapped between a better attitude towards risk that would typically offer a lending hand and weakening domestic data. An earlier trade report showed an increase of 1% in exports, boosted by overseas demand for gold and a 3% dip in imports as demand for fuel dwindled. Adding to the feeling that consumption is weakening, a retail sales report unexpectedly declined during October. Expectations of a rise of 0.4% month-on-month were dashed by the reality of a 1.1% slide. Adding insult to injury, the previous monthly gain was all but erased by downward revision. The Aussie last bought 96.62 U.S. cents. Earlier in the week an anemic third quarter growth report was the least appealing since the contraction at the end of 2008.

Canadian dollar – A more appealing risk environment continues to bolster the Canadian dollar. Unlike the Aussie dollar, the Canadian offers the prospect of future yield increases should the U.S. and therefore Canadian economies rebound. Australia appears to be getting closer to a neutral position by the day. And with crude oil price rises supporting the North American unit, it looks like a far-better play at this stage, which explains its ongoing gains relative to those of the Aussie. Today the loonie has risen to 98.94 U.S. cents and don’t forget that Canada’s employment report will be released ahead of that of the U.S. on Friday.

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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