Dollar rebounds ahead of initial claims data

The tailwind of an extension to tax cuts continues to support the dollar in early New York trading and ahead of another expected dip in the reading of initial weekly jobless claims later in the morning. Despite an overnight setback for the greenback and an absence of European data, the dollar index continues to move ahead at a time when there are few other influences to drive market action.

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U.S. Dollar – A couple of firmer data points from Asia failed to deter investors from preferring the dollar causing its index against a basket of six major trading partners to remain in the black at 80.21 (+0.25%). Investors continue to focus on the implications for growth stemming from President Obama’s payroll tax reduction and extension of Bush-era tax cuts. The potential spur to growth from the joint initiatives is proving beneficial to the dollar on the expectation that incremental growth leaves the U.S. economy more appealing than other developed nations.

Euro – The euro earlier reached $1.3325 before a Fitch Ratings downgrade for Ireland’s sovereign debt upset the applecart and driving the single currency all the way back to $1.3200. German CPI data for November was of no consequence to the market and mirrored the steady performance of the prior month with a monthly change of 0.1% leaving prices 1.5% higher than a year ago. The euro rose only marginally against the British pound and buys 93.95 pence. Elsewhere the unit slipped to ¥111.10 against the Japanese currency.

British pound – In midweek trading, the pound was bolstered by evidence that its undervaluation had garnered strong export demand. That, together with healthy service sector activity that reached a four-month high recently, provided evidence enough to the Bank of England that it has time on its side heading into 2011 and could afford to leave monetary policy and its quantitative stance alone at today’s MPC meeting. Growth has surprised to the upside recently and will meet a tough fiscal policy in the New Year. For now the central bank needs not rush into a fresh round of easing. Nevertheless the pound pared an earlier surge to $1.5841 and fell to $1.5737.

Japanese yen – There was some positive news for the Japanese economy overnight. Japan’s third quarter growth pace of growth edged higher according to a GDP report showing an improvement in the quarterly growth rate. The quarterly pace rose from 0.9% to 1.1% leaving the annualized pace of change at 4.5% after 3.9% in the second quarter. The lack of fresh news from the Korean peninsula also helped buoy Asian currencies. The yen is marginally firmer per dollar in early trade at ¥84.07.

Aussie dollar – The Aussie simply couldn’t maintain an earlier bout of strength that lifted it smartly against the greenback to 98.84 U.S. cents after a surge in hiring. The November employment report provided a positive shock with a headline number showing 54,600 additional jobs were created in the month. Moreover the job hiring came from the permanent side of the line rather than from temporary positions. Along with an upward revision to the October reading the report showed a dip in the headline rate of unemployment from 5.4% to 5.2% as more Australians joined the labor market. The Aussie has since pared gains losing half a cent to stand at 98.35 cents.

Canadian dollar –Canada’s dollar moved further away from parity in early trading and currently buys 98.66 U.S. cents. While crude oil prices remain buoyant some of the froth has been blown off precious metals prices as perceived risks to the North American economy have been removed by tax agreement in Washington.

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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