Dollar losses accelerate

As the global economy continues to thaw, investors are lapping up the melt water to sustain an ongoing foray into riskier opportunities outside of the dollar area. Such ventures continue to drive down the value of the dollar, whose index against a basket of major trading partners has lost 2% so far this year. Also apparently defrosting appears to be sticking points among EU leaders over the appropriate uses of the stability fund. Optimism this morning focuses on baby steps that would perhaps deliver a broader overhaul. The market excitement is lifting the euro higher.

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U.S. Dollar – The dollar saw its recent losses accelerate ahead of data due later in the day likely to show an expansion during January for the nation’s manufacturing sector. And while this performance is likely to be equally as good as anywhere else around the world, that performance plays second fiddle to the expectations of the FOMC who must justify for the next several months at least, an ongoing program of bond market purchases totaling at least $600 billion. The Fed’s sanguine attitude to temporary price increases contrasts sharply with the view across the Atlantic where nothing other than inflation matters. As investors try to keep up with the faster pace of growth around the still-recovering globe, dollar sales resurface in higher-yielding bonds and equities on other sides of the planet. The dollar index showed 0.4% to stand at 77.43 on Tuesday.

Euro – Strong economic data underpinned a rally in the euro and was spurred on by reports that European leaders were nearing agreement on how the European Financial Stability Fund might be better used to allow purchases in some instances of distressed government bonds through private placements. Other mutterings are surfacing that indicate progress towards on overhaul of the stability fund. The euro rose to $1.3775 on such optimism and was supported by a rise in the January reading of the manufacturing PMI, which hit an eight-month high at 57.3 and also felt the tailwind of an upward revision to earlier data. Across the Eurozone, December unemployment eased to 10% although the November data was revised down to the same rate, while data for January showed that German unemployment fell by 13,000 to an 18-year low of 7.4%. The domestic manufacturing sector continued to expand at a breakneck pace with the PMI rising to 60.5. Elsewhere, the data reflected similar health as French and Italian indices both rose.

Japanese yen – The yen rose to its strongest against the greenback since the first trading day of this year to reach ¥81.46 as the dollar collapsed. The yen continued to track gains in other hot Asian currencies on the back of recent gains for exports both within and outside of the region. Investors failed to respond in negative fashion to conflicting Chinese manufacturing data. The official PMI index eased to 52.9 in January following a 53.9 at year end while the private HSBC report was more upbeat and indicated a marginal pick up in the pace of expansion by one-tenth to 54.5. In either case, however, the data shows ongoing expansion within the nation’s key manufacturing base despite ongoing efforts to contain the level of growth in the form of tighter monetary policy.

British pound – A fresh start to 2011 for British manufacturers also saw elevated output with its PMI index jumping to 62.0 after 58.7 in December. This sector represents only 10% of overall GDP. Monetary data from the Bank of England remained limp with mortgage approvals falling short of market expectations while the broad M4 data continues to contract by the month leaving the year-over-year pace of decline at 1.5%. It’s a wonder the Bank hasn’t opted for further quantitative measures to bolster demand. However, the pound surged once again on growing expectations that the central bank will need to raise rates to contain inflation. The latest call was from research group, NIESR, and an advisor to the Bank. The group disagrees with the current policy mix and argues that the Bank should concentrate on fighting inflation today through tighter monetary policy while delaying tax increases for three years and deferring spending cuts until the economy could handle them. And while the NIESR can’t have its way, it predicts that on account of the prevailing policy mix the Bank will make three policy adjustments leaving its bank rate at 1.25% at the end of this year. This convinced more sterling bulls that they are on the right track in seeking firmer policy through the year regardless of the spending axe, which falls in April. The pound ran up to $1.6142 before paring gains to $1.6090.

Aussie dollar – The central bank left interest rates unchanged but investors bought the Aussie on the strength of the accompanying statement. The RBA noted that the global economy appeared fit and healthy and there were signs that rising commodity prices were inspiring private domestic investments. Despite the pace of wage growth, which the Bank referred to as “firm,” it expects 2011 inflation to remain within the target 2-3% range. The RBA said it would set policy and look well beyond the current devastation of the Queensland flooding, which it said would impact near-term prices and growth. An index of business conditions measuring hiring, sales and profits improved according to a survey of 400 companies surveyed by the National Australia Bank. However, its index of confidence declined from 6 to -3. The survey was taken Jan. 10-14. The Aussie popped higher and surged to its best level in two weeks reaching $1.0085 accelerating well beyond parity perhaps fuelled by the lesser chance of any downward revision to monetary policy following today’s meeting.

Canadian dollar – While the Aussie might have rallied by over 1%, on Tuesday the Canadian dollar saw gains of merely one-third of that amount rising to $1.0027. On Monday Finance Minister Jim Flaherty pointed to the challenge of the employment market in the months ahead as the strengthening domestic dollar crimps growth prospects. In December the Canadian economy created 30,400 new positions with Friday’s first report of this year expected to see a halving in that pace of growth.

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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