Dollar Boosted by US Data

The US dollar gained against most major currencies on Friday boosted by US reports showing increased manufacturing and stable consumer price inflation. The troubled euro fell 0.9% against the dollar as ongoing Greek fiscal problems weigh on the euro. Despite recent dollar gains some currency experts expect the dollar to remain weak during 2010. Many expect investors to dump dollar denominated assets in favor of higher yielding securities and currencies. David Bloom of HSBC Holdings Plc stated, “A dollar recovery would require overseas investors to be enthusiastic buyers of U.S. assets. Given the domestic financial imbalances, this seems unlikely, and we expect the dollar to remain weak throughout 2010.” In addition Bloom and his team said that the dollar will remain a favored currency for carry trades. Bloom said, to the extent that carry trades are back in fashion, it may well be the dollar that is the preferred funding currency given its low rates, high liquidity, and continuing current account deficit.” The reluctance of the Federal Reserve to raise rates has negatively affected the dollar and the Fed has said that rates are likely to remain at record lows for an ‘extended period.’

China Tightens Policies

Recent policy changes by The People’s Bank of China have sent ripples through global markets. The central bank said it would increase the proportion of deposits that China’s lenders must set aside for reserves in an effort to rein in growth. The move pressured commodity linked currencies such as the Aussie and kiwi dollars. Lowered commodity prices and reduced demand have pressured both currencies. Australia is a chief supplier of raw materials to China. Yoshihiro Nomura of Trust & Custody Services Bank Ltd said, “China is beginning to show signs of tightening, which should lead to risk aversion. Investors are sensitive to China’s news. I wouldn’t be surprised if the euro-yen were to drop further.”

US Markets Closed Monday

US markets will be closed Monday in observance of Martin Luther King Day but several reports are due later in the week from the US. Data to be released this week includes U.S. net capital flows, producer prices, housing starts, and initial jobless claims.