Dollar under fire from early optimism

The dollar is coming under fire across all fronts following a rise in risk appetite in all corners of the globe. Japan has decided that it has a moral obligation to shore up Ireland through purchasing more than one-in-five bonds issued by Dublin this year and next under a €50 billion financial aid facility. The move follows China’s recent support for Portugal. Meanwhile the Chinese yuan rose at a decent clip overnight and ahead of Premier Hu Jintao’s visit to the U.S. next week inspiring a rerun of the recent risk-on approach towards Asian dollars. Despite negative domestic news in Britain and Australia, both units have rebounded against the greenback.

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U.S. Dollar – Recent gains for the dollar have come from an improved tone to domestic data while investors frown over the prospects for the single European currency. Data from China overnight suggested the nation’s banks lent more than the Peoples Bank of China had targeted. However, the bigger news was a permitted appreciation of the Chinese yuan, which observers claim is an effort to show good will ahead of Premier Jintao’s Washington visit next week. The dollar index slipped to 81.10 as the dollar fell out of favor at the start of Tuesday’s trading.

Euro – An early assault on the euro failed to gather momentum stopping half a cent shy of Monday’s weakest point leading to some nervous euro buying. Overnight Japan’s Finance Minister Yoshihiko Noda committed some of his nation’s more than $1 trillion in reserves to aiding the Irish government. He said that as a leading nation Japan must send a signal of confidence in the financial assistance fund announced last month under which Ireland is due to issue €50 billion euros this year and next. Japan would like to buy as much as 20% said Mr. Noda. The euro rose Tuesday to $1.2982 as investors either went long or covered existing short positions in the single currency. Against the Japanese yen the unit rallied away from close to a four-month low and today buys ¥107.54.

Japanese yen – The dollar has come off an overnight high at ¥83.16 to trade at ¥83.00 per dollar although the yen remains lower on the session following Finance Minister Noda’s Irish embrace. It is, however, no surprise to see the yen weaker this morning as traders plow back into risk. Monday’s move up in the yen was associated with a broader loss of confidence as European debt fears rose and so an unwinding of such concern ought to suit the dollar more so than the yen.

British pound – A dip in the December fortunes for British retailers weighed heavily on the pound earlier in the day sending the pound half a cent lower against the dollar to $1.5513. Concerning investors currently is the building evidence that fiscal austerity measures are biting into domestic demand leaving external demand to take up all the running in 2011. Their conclusion is that this can’t be a good thing for the pound, which later rallied to unchanged on the session at $1.5573. The British Retail Consortium reported a weather-related drop of same store sales of 0.3% compared to a year ago following a nice 0.7% gain for the data in the previous month. The pound later rose against the yen to buy ¥129.20 and remained slightly weaker against the euro at 83.23 pence.

Aussie dollar – The fact that Australia’s third-largest city is underway with evacuation procedures crystallizes the deteriorating circumstances brought about by an escalation in the severe weather affecting the state of Queensland. Investors have pounded the domestic dollar on rising concerns for growth in the region and this morning sent it to its weakest point in a month when it traded at 98.20 U.S. cents. The Aussie has done little but fall for the last seven trading sessions given the growing uncertainty surrounding the affair, but today has rebounded sharply as selling dried up and investors took to picking on the greenback instead. The Aussie rebounded sharply to reach a recent peak at 98.86 cents.

Canadian dollar – The Canadian currency is testing Friday’s high inspired at the time by a buoyant employment report. The global recovery provides the loonie with commodity-related demand, while the U.S. recovery adds spice on account of the fact that the world’s largest economy sucks up 70% of Canada’s exports. Today the Canadian dollar buys $1.0089 U.S. 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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