Dollar down as demand for Asian investments rises

Trends in currency markets tend to take on a firmer shape the longer they play out. The trend towards a weaker dollar continues to be plagued by the fact that while it is fading against most Asian units, the greenback refuses to play second fiddle to certain European ones. In addition, the mercurial forward movements taken by the commodity dollars continue to face contrarian setbacks as some bigger players come rushing through the thin markets leaving behind them a scene reminding us of a bull in a China shop.

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U.S. Dollar – A strong theme overnight remains the advance of Asian currencies against the dollar. Investors convinced by gently warmer waters in the United States are looking for higher yields abroad as they watch creeping business confidence and increasing investor appetite for the region’s stocks. Adding to demand for Asian currencies rather than the greenback is an apparent willingness of the Chinese to allow its yuan to appreciate. In January President Hu Jintao is expected to visit the United States where he’ll undoubtedly face further pressure to allow his nation’s currency to appreciate. Already the Peoples Bank is playing a key role and has set the yuan’s daily reference rate at ever-increasing levels for the past seven sessions. In part this reflects a determination to use a stronger currency to fight inflation and is part of a three-pronged effort to cool inflation by reining in the economy. Four days ago the Bank raised official interest rates by 25 basis points and has increased the reserve ratio requirement steadily in order to harness banks’ ability to lend. The JPMorgan Asia dollar index measuring 10 most popular currencies traded against the greenback and excluding the Japanese yen rose to a six-week high today as creeping demand for higher-yield maintained its presence. The U.S. dollar index is nevertheless only marginally lower at 80.29 as the dollar refuses to buckle against European currencies.

Japanese yen – Most economic calendars have run-dry for the year as investors remain sidelined through New Year. The yen has fallen from yesterday’s highest reading in six weeks with Japanese yen bulls failing this morning to come close to pushing the dollar down further. The dollar has recently strengthened to ¥82.20.

Euro – The euro faced a two-cent range in Tuesday’s trading after some short positions appeared to exit. In so doing they drove the euro to a peak at $1.3275. Without prompting later in the day the single currency slid to $1.3084. In midweek trading the euro jumped to $1.3157 before retesting support close to $1.3100. The unit is largely unchanged and last traded at $1.3131. It still feels as though there is plenty of resistance on account of looming sovereign debt issues to awarding the euro with a clean bill of health for 2011. It’s hard to see the immediate future looking rosy for the euro.

British pound – The pound is heading back towards an unchanged reading of $1.5366 against the dollar after an earlier rally faded. Several months ago under identical circumstances when risk appetite helped buoy high-yielders, you could count on the pound to be in the same club. However, these days the same cannot be said on account of the looming dent to growth that 2011 has the potential to deliver. A rising sales tax falls into place at the weekend while a round of cost-saving government job cuts comes into effect in the new fiscal year in the second quarter. And so as the New Year draws nearer and investors weigh up the relative potential across the currency spectrum, the pound no longer stands out as a growth rebound play. The pound also dipped against the euro to 85.38 pence and eased to ¥126.38 against the yen.

Aussie dollar –Failure to clear Tuesday’s high at around $1.0150 forced some investors to take profit on Wednesday in the Australian dollar. It subsequently pared its recent rally to $1.0112 after a bout of bullish trading for other Asian units failed to better its earlier trend higher against the greenback. The selling in the Aussie was notable after its bedfellow of the Canadian dollar witnessed a large spike lower in thin trading conditions.

Canadian dollar – With little meaningful data left for the Canadian dollar this year, the unit earlier continued to match gains seen in other growth-sensitive currencies. Rampant commodity prices have maintained the appeal of the loonie. However, it appears that some investors may have leaned a little too hard on the Canadian earlier either in an effort to test the depth of the market or to exit a profitable position as fast as possible. The local dollar fell from just ahead of parity with the dollar to 99.30 U.S. cents in the space of less than an hour this morning as volume accelerated. The Canadian, though, has quickly rebounded and stands at 99.84 cents.

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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