Dollar risks losing 'currency of last resort' status

IB FX Brief: Currency rise above growth warnings

A slide in commodity prices following red-flag warnings over the likely impact to growth turned out to inflict little more than a flesh wound to investors who have recovered remarkably overnight. A rally for Asian equity prices has put the dollar under pressure ahead of a key reading for the health of the consumer in the world’s leading economy. At the same time growth-sensitive units have perked up at the expense of the Japanese yen, which seems to have discounted heightened concerns surrounding radioactive leaks from its frazzled nuclear power plant.

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U.S. Dollar – The dollar remains snared these days and appears to be the last choice for bulls or bears under the ebbs and flow of alternating risk aversion. When the chips are down and investors can only see downturn ahead they are increasingly prone to choose the yen or the Swiss franc over the dollar, which appears to be fast-losing its mojo in times of turmoil. And when risk appeal resumes there appear to be far more currencies whose central bankers will be more likely to shift monetary policy up a notch on inflation or simple monetary policy normalization grounds. The dollar continues to lose its way in the yield jungle at every turn. New York Fed’s William Dudley yesterday frowned over the health of the U.S. economy when he claimed that it remained “far away” from what the central bank aims for on employment and job creation. Later on Wednesday the health of the consumer will be reported in the March retail sales report, which saw consumers pare their pace of spending over a 1% advance in February. During the afternoon the Fed will publish its Beige Book used to poll businesses nationwide to help drive policy decisions when the regional banks meet. The dollar index is marginally lower at 74.83.

Japanese yen – The overnight rebound in risk appetite dampened demand for the yen as dealers speculated that Japanese investors would put investments to work overseas. News that the increased levels of radiation had caused the government to raise the status of the nuclear disaster to the highest has fallen off investors’ radar screens equally as fast as it appeared. The yen is lower per dollar midweek at ¥84.14 having rebounded from ¥83.50 in European trading. Against the euro the yen is 0.8% weaker at ¥122.00.

Canadian dollar – Crude oil and gold prices fell heavily on Tuesday after warnings from several areas that extended price action might be ripe for a corrective selloff at a time when investors have pushed the envelope on how far resources can rise without crimping growth. The loonie is firmer this morning and buys $1.0397 remaining well north of parity with the greenback where it has been since the start of February. The Bank of Canada releases its Monetary Policy Report today having left policy on hold on Tuesday. At the time it raised its growth outlook for this year from 2.4% to 2.9% and said that full output would be achieved by mid-2012. However, it also pared its forecasts for the next two years and warned that a rise in the currency would dampen export demand.

Aussie dollar – A Chinese website predicted an imminent increase in the reserve ratio requirement from the Peoples Bank and helped remind investors that the growth outlook remained robust. Asian stocks rebounded overnight shrugging off an IMF downgrade for growth in leading economies. A measure of consumer confidence released by Westpac improved for April adding 1.2%. A separate report showed an increasing number of skilled job vacancies underpinning a healthy labor market. The Aussie last traded higher against the dollar at $1.0492.

British pound – Jobless claims rose marginally during March counter to predictions for a second monthly decline, while a health February dip in the reading was revised back down. The overall rate of unemployment fell, however. The pound weakened following the data report but currently remains higher on the session against a weaker dollar and buys $1.6270. Inflation data released on Tuesday deflated many investors’ expectations for a nearby tightening in monetary policy and helped weaken the pound. Against the euro today the pound is a little lower at 89.02 pence.

Euro – With limited challenge from the greenback the single European unit continues to forge ahead and on Wednesday reached a session high of $1.4520. Following the ECB’s recent rate increase the euro not only yields a full percentage point above the dollar, but also has a built-in advantage over expectations for the next 12 months of a similar margin. Data on Wednesday showed a fifth-straight monthly increase in Eurozone industrial output, which expanded by 0.4%, albeit at a slower than forecast pace. Today’s reading leaves output 7.3% higher than one year ago and fails to dampen market sentiment towards the next ECB move on rates.

Andrew Wilkinson

Senior Market Analyst

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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