There’s nothing remarkable about today’s ascent in the value of the dollar’s basket to its strongest in six days except for the fact that the session is hardly off to a risk-averse start. Government bond yields around the world are on the rise while equity indices have casually rebounded and in pre-market trading, U.S. indices are buoyant and crude oil prices have come off the boil.
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U.S. Dollar – The only major unit managing gains versus the greenback is the Canadian unit, which is feeling the glow from a raging rally in the price of oil and a string of record advances for the price of gold. The dollar’s gain is hard to explain although clearly evident on Tuesday. Three Fed Governors have each explained why not to pursue further the semi-finished quantitative easing after June and such accord may be one reason why dealers are less pessimistic on the prospects for the dollar. Yet in the cold light of day it’s pretty self-evident that the economy is in far better shape. It’s a matter of semantics as to whether to credit the Fed. Investors and policymakers alike are finding it tough to argue that more should be done when the planned purchases aimed at driving down borrowing costs have finished.
Euro – Trading the euro has been a challenging sport of late. On the one hand, the threat of inflation has rekindled the burning embers beneath the governing council at the ECB to the point that its members can no longer stand the heat. The reality of a widening yield cushion in favor of the euro is now assured and provided an immediate fillip for the euro when President Trichet warned on an imminent tightening of policy. But fact remains that the problem of inconclusiveness to the debt crisis never really went away and it appears to be resuming, acting as a drag on the single currency. The euro is fast-falling back to earth to its pre-Trichet levels delineated by $1.3900 versus the dollar. It’s also weakening from a nine-month high against the yen to ¥114.83.
British pound – On Thursday the Monetary Policy Committee meets to determine interest rates, although the likelihood of a change following the February inflation report is altogether remote. Apart from the theme of a stronger dollar, demand for the pound was dulled by further reminders that the prospects for growth face significant challenges ahead. While others prefer to wag their fingers at the Bank over 10 consecutive inflation misses, central bankers keep pointing out that if they were to act to ward off what they see as temporary inflation pressures, the GDP profile would weaken. A British Retail Consortium report released earlier showed sales sank in February to reverse an earlier gain of 2.3% and showed a decline of 0.4%. Elsewhere, a RICS survey indicated a balance of home surveyors still reported a majority view of falling home values. Nevertheless the report indicated that transactions and enquiries were rising. On balance neither of today’s reports can be used by bearish MPC members to bolster the case for raising monetary policy this week. The pound slid back to $1.6161 against the dollar.
Aussie dollar – The Aussie is daring bears to drive it lower and is resting on support at $1.0075 in New York trading. A rise to a 29-month high for crude oil prices is raising question marks over the sustainability of global growth and that’s not a healthy prospect for a growth sensitive commodity dollar. On the home front, an NAB survey of business confidence rose in February to its best in almost a year. Rising corporate profits and a sense of confidence in the rebuilding of the state of Queensland helped lift the confidence index from four to 14 last month. An index of business conditions also rose to negative two from negative six.
Japanese yen – With a steadying in Asian stocks, some fears were removed and helped weigh on demand for the yen. The dollar rebounded to buy ¥82.61 and currently appears to be building on gains rather than faltering.
Canadian dollar – After earlier stretching to a session high at $1.0288, the loonie is back to unchanged at $1.0264. The Canadian dollar doesn’t mind the harsh climate of rising oil and commodity prices and so long as the U.S. economy continues to perform, the Canadian will do well.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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