Investors continue to bid riskier assets higher with the latest influence coming in the shape of hawkish comments from a variety of Fed members. Healthier risk appetite recently has hindered the dollar recently as Chairman Bernanke dumbs down labor market developments leading investors to conclude that its exit strategy is still under wraps. But open suggestions that its quantitative support might end sooner than planned and predictions that the Fed will have to adjust its short rate before long is breathing life into the dollar’s miserable existence.
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Euro – Playing right into the hands of dollar strength was the continued domestic political mess confronting German Chancellor Angela Merkel. Her political party has controlled Baden Wuerttemberg for 58-years but saw its loyalty drop like a rock in weekend state elections. The euro is currently treading water just above Friday’s low point inspired by the Fed’s Charles Plosser who warned that the Fed could surely not keep interest rates low for much longer. Adding to the dead-pan expression of the single currency on Monday was an initiative by the incumbent Irish government to make senior bondholders at the nationalized banks shoulder losses. The new government wants to secure lower interest rates on the collateral borrowed as a result of the nation’s bailout but European lawmakers have reservations about the tactic over fears that such a precedent to burden banking losses on institutional shoulders would quickly spread causing panic-selling of both Spanish and Portuguese debt. The euro last traded at $1.4033 but managed to rise against the yen to ¥114.76.
U.S. Dollar – St. Louis Fed Chief James Bullard told an audience in French Marseilles that the FOMC should examine carefully whether to continue its current quantitative policy and especially so at the April meeting. He claimed “the economy is looking pretty good,” and also said that it would take a larger and sustained jump in energy costs before having “a material impact” on the economy. Mr. Bullard’s point that the economy might not need that much more stimulus seems to be drawing a crowd to the dollar, many of whom had given up on any kind of exit from its generous monetary policy. The dollar index is sharply higher over Friday morning and currently trades up at 76.33. Investors remain wary of comments from his Fed colleagues later today. Chicago’s Evans and Boston’s Rosengren join Atlanta Fed’s Lockhart later on Monday. On Friday Dennis Lockhart said that while its current policy is appropriate, recent signs of faster inflation if sustained would make him prepared to tighten policy.
Japanese yen – The yen responded to a firmer dollar and growing risk appetite around the world by easing back towards ¥82.00 per dollar earlier in the overnight session. The dollar currently buys ¥81.72 but appears well-supported for now as investors pay less attention to the slow process of helping Japan recover from the earthquake. The yen weakened on all fronts falling against the euro, Aussie and British pound.
British pound – The pound reached below $1.5950 in the European session with very little influence from data on the agenda. An interview in Britain’s Guardian newspaper with external Bank of England member Adam Posen helped further douse expectations for an interest rate increase anytime soon. Such loss of weight to the monetary tightening argument recently despite inflationary pressures has seen the pound plunge from $1.6400 one week ago to its lowest in two months against the dollar. Mr. Posen continued to vote in favor of more asset purchases at the March 10 meeting and in the Guardian interview predicted that economic weakness and government austerity measures would cripple consumer activity. The result will be a drop in consumer prices next year to 1.5% and back below the government’s 2% ceiling. The pound also fell against the euro, which today buys 87.83 pence.
Aussie dollar – Although equity prices in Asia and the Pacific region were mixed overnight there was a healthy sense of risk appetite, or at least enough to see the Aussie dollar reclaim its crown against the U.S. dollar as it rose to another record high at $1.0314. Since that point the unit dipped in to the red for the day but has found its feet and stands at $1.0270.
Canadian dollar – The Canadian dollar is benefitting more from the hawkish perceptions surrounding the greenback today than is the U.S. dollar itself. Despite a dip to $103.80 in the price of a barrel of crude oil, the local dollar has reversed Friday’s losses to buy $1.0225 U.S. cents. There is no Canadian data due today.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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