Dollar’s early gains fading

Despite the fact that several major market centers remain closed because of New Year holidays, the dollar has come out all guns blazing at the start of 2011. The dollar index is up while the exaggerated moves to start January mirror those at the end of December. As expected, single currency concerns over governments’ ability to raise debt make it an easy sell as volumes creep back into the market. Australia, New Zealand, Japan and Britain remain closed until later in the week, which means that early trends may encounter exaggerated movements as players come back into the market.

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U.S. Dollar – The dollar index rebounded sharply from an hourly tweezer-bottom formation on the charts at 78.78 to trade almost 1% higher on Monday at 79.52. Currently the dollar basket stands 0.4% higher on the day at 79.34 ahead of an ISM manufacturing report that might show the healthiest pace of expansion in seven months. During December, a pair of regional Federal Reserve surveys reported manufacturers producing at a gangbuster pace as the recovery shifts gear. Earlier strength in the sector, which only accounts for approximately 11% of national output, was because of a rebuild in inventories with companies having slashed stocks as the recession lengthened. Now the recovery is spreading to feed growing consumer and business demand.

Euro – The single European currency swallowed up Estonia over the New Year break to become the official unit of currency now for 17 nations. The immediate move to start 2011 trading was a sharp fall in the value of the euro to $1.3250 for the sharpest fall in two weeks. The euro has subsequently recovered from early selling pressure to stand at $1.3330 but the core theme remains the challenge to its survival during 2011 on account of growing fears over member-nations’ ability to tap the bond markets for cash. France auctioned €8.5 billion of debt to commence the year on Monday. The euro lost ground against all but one of its 16 major trading partners as investors play out fears for Spain and Italy, who later in the spring will be hunting for buyers of €400 billion of debt as maturing bonds fall due. The euro remains unchanged against the Japanese yen at ¥108.60.

Japanese yen – The dollar rallied to as high as ¥81.46 against the yen while Tokyo remained closed. Over the weekend China released purchasing managers’ index data for manufacturing and services. The manufacturing sector reading shrank to 53.9 from 55.2 in a sign of further response to ongoing monetary tightening. The services reading, however, rose to 56.5 from 53.2. The flip side of a weakening in the manufacturing sector is lower inflation, which some analysts now expect for the next several months. In December CPI in China rose to the highest pace in 28 months causing concerns for investors looking for further response from the Peoples Bank of China.

British pound – The pound matched the weak performance in the euro and slumped by two cents from Friday’s high against the dollar. It stopped skydiving at around $1.5450 this morning and currently trades at $1.5500. Britain celebrates New Year for another day meaning data releases will be absent until Wednesday when traders get back to their desks.

Aussie dollar – The Aussie gave back all of Friday’s price gains in the European session to start the year making the move look spurious. The dollar fell to $1.0184 before recovering to stand at $1.0208. Sydney remains closed.

Canadian dollar – The Canadian dollar is currently reversing earlier weakness and buys $1.0085 U.S. cents in early New York trade. There is no data out in the early part of the week and investors will attempt to match the loonie’s performance with that of rising commodity prices. The price of crude oil is off to a flying start with an early rise of almost a dollar per barrel to $92.19.

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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