Dollar tripped up by thin markets

The failure of the euro to weaken further through support below $1.3100 coupled with extremely thin holiday trading conditions have created the perfect bear trap in early North American trading on Tuesday. The dollar was already losing its recent momentum as investors wondered whether improving economic figures were dollar bullish or whether they would lend themselves to a more favorable environment for riskier propositions. The question was answered by another strong day for the Aussie building on gains inspired by bulging prices of raw materials and minerals. Thin trading conditions created a vacuum across most currency pairs causing a sharp upward move against the dollar once stops were triggered.

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Japanese yen – The yen was once again strong following continued yen purchases by exporters before they cease trading for the year. Finance Minister Noda once again reiterated his threat against “one-sided” currency movements and renewed his commitment to take “bold action” as the yen rose. The dollar weakened against the yen to ¥81.83 following several pieces of encouraging news for the Japanese economy. The jobless rate remained at 5.1% in November. Retail trade jumped 1.3% compared to one year ago and surpassed a forecast of a gain of 0.4%. In the prior month the report weakened by 0.2% year-on-year. Output of transport equipment increased for the first time since March, while electronic parts and device manufacturers increased output for the first time in six months. At ¥108.45 the yen is also pressuring the euro with its strongest performance in a month.

U.S. Dollar – The dollar has lost more than 0.5% on an index basis following strong gains for the commodity dollars and a rebound in the euro coupled with further strength in the yen. Some reports suggest that a morning report on the health of the housing market will display further weakness, reminding investors that the Fed is a million miles away from raising interest rates. I’m more inclined to believe that the parlous state of the housing market is already factored into the dollar’s position and that it’s more a case of thinning year-end markets that are behind the move. Another private survey reports a strong 5.5% jump in retailers’ sales in the four weeks ending December 24 as unemployment benefit claims fall to a two-year low and consumer confidence rises to a six-month high.

Euro – There is no evident catalyst behind a two-pronged surge in the value of the single currency on Tuesday. An initial Asian time zone move above $1.3175 was likely stop-driven and pushed appetite for the single currency to $1.3250 where it consolidated into the European time zone before finding further support. The euro climbed to a session-high at $1.3275 before the buyers had cleared the decks leaving the currency reversing dramatically towards $1.3200. French third-quarter GDP was revised marginally lower although this had little impact on an otherwise data-free session.

British pound – The pound was slow out-of-the-gate in response to the decline in the value of the dollar. However, it really couldn’t stand the going above $1.5500 and quickly sank as demand for euros waned. Currently the pound trades at $1.5471 while Britain remains shut for Christmas holidays.

Aussie dollar –The Australian dollar has rebounded from a dip below par with the dollar inspired the day after Christmas when the Chinese raised interest rates. However, the Aussie is now into its fourth session above parity and the move accelerated today in the absence of domestic buyers who are also still in festive holiday mood. The Aussie jumped to $1.0150 and is within spitting distance of the early November high at $1.0183. Relentless commodity price gains invigorated by a weakening greenback have also conspired to support the Aussie’s momentum.

Canadian dollar – Even as the euro comes back off the boil, the gain for the Canadian dollar continues with the commodity dollar attempting to clear its highest point in seven weeks at 99.94 U.S cents (March ’11 future). On a spot basis the Canadian dollar has just broken parity as firm minerals and materials prices keep it well bid.

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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