Dollar rallies after S&P ratings downgrade

British pound – The pound initially traded up to $1.6459 against the greenback on the premise that it represented one of the few viable safe havens. The British government made sure that within weeks of its election last year it ushered through stringent austerity measures keeping the ratings wolves from its door. That plan has worked reasonably well except for the resulting near-dereliction of growth from within the economy. The pound rose versus the euro, which buys 86.87 pence having reached its strongest since May 27. The employment situation within Britain continues to reflect the resulting fiscal burden on Briton’s workers. A Lloyds Corporate Bank employment confidence survey fell by three points to a reading of negative 53 in July as employment prospects and job security both tumbled compared to a year ago among survey respondents. Confidence in the pound took a bashing as risk aversion grew sending the dollar higher to $1.6346.

Japanese yen – The Finance Ministry found itself having to warn speculators that it was ready to engage in a second round of yen sales if the one-sided nature of its currency failed to abate. It’s hard to tell apart demand for the safety of the yen and disdain for the dollar at a time when the dollar is pounding higher against growth-sensitive units. Confidence in the Japanese recovery stepped up according to a July economy watchers survey where the current situation improved from 49.6 to 52.6. However, forward-looking optimism fell by the wayside as the index tipped from 49.0 to 48.5 indicating that the prospects six-month forward were fading. The yen recently reached its session high in New York at ¥77.56 while it surged to ¥110.54 against the euro.

Canadian dollar – While the Canadian monetary authorities might actually welcome the recent weakness in the value of the domestic dollar, the fiscal authorities might be feeling somewhat irritated by the apparent lack of confidence in a pristine budget stance. The Canadians are likely to return to deficit well before any other G7 nation, not that you’d guess this from a loss of appetite for the so-called loonie, which on Monday slid to its lowest since June 28. The move, however, comes as part of a broader loss of confidence in risk appetite and reflects greater concern over the prospects for global growth. Key commodity prices have tumbled out of bed on Monday morning with one of those being the Canadian dollar, which at $1.0122 U.S. cents is en route to parity, where it hasn’t traded since February. Arguably, the crisis is worse today than it was six months ago.

Aussie dollar – The Aussie is faring worse than the Canadian dollar as risk aversion spreads. Apart from the obvious selling of riskier bets in general, some of that reason belongs to the prospects for interest rates. The Aussie has been cushioned by about four percentage points in yield differential against the dollar as the successful rebound in growth played out. But as growth clouds have gathered on the horizon, investors have been forced to deal with the growing plausibility that the Reserve Bank is likely to prick that cushion to deal with slowing external and internal levels of activity. The Aussie on Monday swooned to $1.0302 U.S. cents to its weakest reading since March.

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.

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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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