As fear gauges rise around the world with the increasing use of the term 'deflation,' the dollar is weakening against a basket of competing safety havens. The surging price of crude oil brought about largely by a speculative binge is likely to lengthen the so-called 'extended period' of accommodative monetary stance at the Federal Reserve. At the same time the eye-popping jump in energy costs is feeding inflationary fears elsewhere causing speculation that tighter monetary policy will lead a slowdown.
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U.S. Dollar – With equity index futures already are stumbling backwards as today’s initial claims data is likely to be a no-win situation for the greenback. Its index against a basket of major trading partners remains lower by 0.2% at 77.26 and even a low level of unemployment benefit claims could quickly be consigned to the trash can as historic data in light of the speed of events shaping the Middle East. There is little that can be done to persuade speculators that supply disruptions are limited or that leading oil-producers could pick up the slack. Meanwhile economists are diligently revising down growth estimates as a result of firming energy prices with the altogether more dire prospect of recession should crude oil prices remain elevated for longer. Even a spike could have a substantial psychological impact on both hiring intentions and consumption. The FOMC is likely to remain on hold for longer at this stage with a widening of the reach of political uprisings showing no sign of abating. The traditional safety aspect of the dollar is playing second fiddle to the Japanese yen. No one really anticipated firmer monetary policy from Japan until perhaps next year while the role of the Swiss franc as an alternative to the troubled euro has driven it to a record against the dollar today.
British pound – The risk-off nature of trading is weighing on the pound today because lower growth is a challenge to the clarion call of those assuming the Bank of England must tighten monetary policy to control inflation. Overnight MPC member David Miles warned that the central bank need not tighten policy in order to earn its inflation-fighting credentials, at least not in aggressive fashion. He noted that the risk to the Bank’s growth profile was to the downside. Events unfolding in the Middle East must surely raise the stakes on that count. Meanwhile Mr. Miles also admitted that inflation was “deeply worrying” but argued that it was not the result of necessarily loose monetary policy but instead was rooted in tax increases and rising commodity prices. Elsewhere the pound was rocked by a CBI report showing that retailers expect to see sales stagnate in March. The pound fell across the board and buys $1.6162 today while a strengthening euro buys 85.16 pence.
Aussie dollar – The performance of the commodity dollars remains a curiosity today. Global stock markets continue to fall out of bed as they should as fickle leading indicators of the health of the economy. Dealers appear to be treating the rising prices of gold and oil as instant karma for dollars sensitive to commodity performance without looking beyond at the possibility that the global economy could very easily shift to a lower plane for growth. The Aussie has also responded to a report showing a record quarter for capital investment spending by companies reacting to rising demand for raw materials from China and India. The Aussie fell earlier on risk aversion concerns to a session low just north of par with the dollar at $1.0002 to trade all the way back up to $1.0082.
Canadian dollar – While it is difficult to pinpoint, the jolt in the Canadian dollar could be the work of a large investor closing out a short position. On Wednesday the rising greenback shoved the Canadian aside forcing it to as low as $1.0040 U.S. cents as risk aversion rose. However, the rebound today can hardly be vilified purely by rising oil price in London and New York given the threat it poses to global growth. The Canadian dollar coincidentally advanced to $1.0175.
Euro – Investors have quickly concluded this week that the lack of rebuttal to last week’s hawkish comments from ECB member Yves Mersch must mean that his colleagues concur that a firmer monetary convention should be set in place. Whether that means raising rates or indicating that they should be raised has euro-bulls firmly behind the single currency today. Earlier the euro bought $1.3807 with no signs of worry over sovereign debt in the air and boosted by a report showing Eurozone economic sentiment rose to the highest since August 2007.
Japanese yen – The yen’s role as a better safe haven venue than the dollar saw it rally to ¥81.77 and its best since February 8. Falling yields in the U.S. have dulled the appeal of the dollar during the escalation of the Middle Eastern crisis and despite signs that the Japanese government has been successful in fighting deflation, no one promised tighter monetary policy in Japan. To that extent the yen has maintained its power at a time when concerns that the Fed might abandon its ultra-low policy have diminished.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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