Posted on 30 March 2010
Low Fed Rates Could Fuel Dollar Rally
Some currency Analysts believe that the Federal Reserve’s recent decision to keep rates at record lows could fuel a dollar rally against the euro and the British pound throughout 2010. Normally low central bank rates are negative for currencies but experts believe if the Fed’s low rated help to promote growth in the US economy that outpaces the euro zone and the UK the dollar will attract save haven investors throughout 2010. Recent economic reports indicate that the US is recovering from the recession at a faster pace than the euro zone and Britain. Many expect commodity linked currencies to rally vs. the dollar as commodity prices rise. Commodity linked currencies include the Australian dollar, the New Zealand dollar and the Canadian dollar. All of these countries have already raised rates and all have commodity driven economies. More than a few currency experts believe that the Canadian dollar will achieve parity with the US dollar sometime this year.
Aussie at Three Week High
On March 29th the Aussie dollar gained in advance of a report expected to show a rise in retail sales. The Aussie hit a three week high and most experts believe the Australian central bank will raise rates to 4.25%. The S&P/GSCI Index of commodities gained 0.5% and is near the highest level since March 19th prompting a rally in commodity linked currencies. The Aussie dollar gained 0.4% on the greenback trading at 92.16 U.S. cents and gained 0.6% on the euro trading at A$1.46. The Japanese yen fell 0.5% vs. the Aussie and traded at 85.24 per Australian dollar. The Canadian dollar rose 0.7% to C$1.0196 per U.S. dollar and most expect the currency to hit parity with the US dollar by June 2010.
Australian Central Bank to Raise Rates
Benchmark rates in Australia are currently 4% and are 2.5% in New Zealand. Australia is also in the enviable position of being one of China’s biggest suppliers of raw materials. These rates compared to US rates near zero and 0.1% in Japan makes the higher yielding Aussie and Kiwi attractive to investors. Reserve Bank of Australia Governor Glenn Stevens said that rates may be increased soon to control inflation. Stevens also said, “It’s not wise to leave interest rates right down at rock bottom any longer than you need. It would be not doing people any favors to have a prolonged period of very low rates and then hammer them unexpectedly.” The Kiwi gained in advance of a government report that is expected to show that home building approvals rose in February.
Posted on 17 March 2010
UK Unemployment Claims Fall
The pound rose on Wednesday after better than expected UK jobs data. The UK government reported that unemployment claims fell by 32,000 in February the largest decline since 1997. The pound has been hammered by recent housing data and fears that upcoming elections could produce political gridlock crippling the nation’s ability to deal with economic problems. Commenting on the new employment figures Bank of Nova Scotia currency strategists Camilla Sutton and Sacha Tihanyi stated, “This is the fastest pace of decline in jobless claims since 1997. The pound has definitively broken to the topside and is challenging resistance.” The euro surrendered recent gains after a German government official said that EU finance ministers had made “no decisions” regarding aid to Greece. Ulrich Wilhelm said in Berlin that no decisions about aid to Greece are likely to be made at the upcoming EU summit. Opposition to aid for Greece is widespread in Germany. Boris Schlossberg of GFT Forex said, “The Germans have been the primary sticking point in creating a pan-European solution. Any resistance casts doubt on solving the Greece problem and helps push the euro lower.”
Dollar and Yen Pressured by BOJ, Fed Decisions
The US dollar and the yen fell after decisions by the Bank of Japan and the US Federal Reserve. The BOJ doubled its loan program designed to fight deflation and the US Federal Reserve said it would leave interest rates at historic lows. Rising oil and commodity prices combined with a rise in risk sentiment lifted commodity linked currencies such as the Canadian dollar, the Aussie dollar, Kiwi dollar and the S African rand. Andrew Wilkinson of Interactive Brokers Group stated, “Everything is doing OK against the dollar and the yen except the euro. Greece just won’t go away, and that doesn’t sit well with the market.” Twenty years ago Harvard University Professor Martin Feldstein called the newly created euro an “economic liability” and now warns that Greece’s austerity measures will fail and that Greece may have to exit the European Monetary Union to fix its massive debt problems. Feldstein said, “The idea that Greece can go from a 12 percent deficit now to a 3 percent deficit two years from now seems fantasy.” Feldstein has been an adviser to several US Presidents starting with Ronald Reagan.
Weak Euro Causing Problems
The weak euro has caused problems for European manufacturers. Since most raw materials such as oil are priced in dollars imported goods are more expensive and could lead to a rise in consumer prices. Until the EU comes up with a concrete solution for the Greek debt crisis downward pressure on the euro is expected to continue.
Posted on 18 February 2010
US Dollar Close to Seven Month High
The US dollar is now close to a seven month high against a basket of major currencies after released minutes of the FOMC meeting showed that Fed officials discussed exit strategies from stimulus programs. The euro fell against the dollar and is now near a nine month low hit earlier this week. Released Fed minutes revealed that many Fed policymakers want to begin selling securities as the US economy improves. The greenback was also lifted by data that showed U.S. housing starts rose to a six-month high in January and industrial production increased. Johan Javeus of SEB in Stockholm stated, “It hasn’t been a huge move but the Fed minutes have helped the dollar as they were perceived as hawkish. Whereas before there was a sense that the ECB would be ahead of the Fed in raising rates it now looks increasingly likely that the Fed will move before the ECB.”
Gold Prices Drop
Commodity linked currencies were pressured after the International Monetary Fund said it planned to sell gold on the open market. The IMF plans to sell 191.3 tons of gold to raise funds for lending. Spot gold prices fell dragging down the Aussie dollar. The Aussie fell 0.4% to $0.8957 and the Kiwi dollar fell 0.5% to $0.7000. Commodity prices were affected by a stronger dollar and the IMF announcement. Gold fell to $1,100 an ounce. Jonathan Cavenagh of Westpac stated, “The gold sale news is weighing on the Aussie especially against the U.S. dollar which is seeing a biddish tone.
Greek Crisis Threatens Euro Zone Assets
The pound fell 0.5% vs. the dollar to $1.5587 after data showed public sector borrowing at 4.339 billion pounds last month causing the first January deficit since 1993. Tom Levinson, currency strategist at ING stated, “Everyone is very focused on the euro zone fiscal situation at the moment, but the UK is in every bit as bad a shape.” Greek budget deficits and the lack of a coherent plan by EU officials have hammered the euro in currency markets. Last week EU ministers issued vague statements that left investors worried about the integrity of euro zone assets. German opposition to any kind of aid to Greece remains fierce in Germany but should Greek problems threaten the euro Germany may have no choice but to help Greece. This year Greece’s debt will reach 120% of GDP and must try to sell 53 billion euros in debt this year. The euro is likely to remain under immense pressure until the Greek crisis is resolved.
Posted on 21 December 2009
Dollar Sheds Risk Trading
A Bloomberg article has pointed out that the US dollar is now rallying ‘in tandem with stocks’ for the first time since the demise of Lehman Brothers. For most of the past year the dollar has been traded on risk sentiment. Some currency experts believe that the worst may be over for the dollar. The dollar, equities and raw materials are on track for their largest two month gain since 2008 when the recession reared its ugly head. The correlation between stocks and the dollar reflects investor confidence that the US will be the first to recover from the current global recession. In the past the dollar gained as investors sought safe haven from economic turmoil. The dollar weakened when investors took advantage of record low Fed rates to finance carry trades. The dollar has also benefited from year end profit taking.
Fed to Withdraw Stimulus Packages
On December 4th the news that the US unemployment had fallen the most in three years pushed the greenback higher as investors bet that the positive data would convince the Federal Reserve to raise rates. The DXY rose 1.7%, the largest gain since January 2009 when UK banking troubles increased the demand for the safe haven offered by the dollar. Dennis Gartman wrote in the Gartman Letter, “We are witnessing a watershed shift in sentiment regarding the dollar. We do not use the term watershed often, but when we do we mean it.” Federal Open Market Committee said on Dec. 16 that it would end most emergency measures by March 2010. The Fed cited “improvements in the functioning of financial markets” The Fed cited, “improvements in the functioning of financial markets” and stabilizing labor markets as reasons for the move. Despite speculation the Fed said it would leave rates “exceptionally low” for an “extended period.”
Euro Zone Banking Troubles
The euro weakened in currency markets after the European Central Bank said that financial institutions may have to write down an additional 187 billion euros ($268 billion USD). The central bank’s loans to property companies and eastern European nations may threaten recovery in the euro zone. Mansoor Mohi-uddin of UBS AG wrote, “Sentiment in the euro zone will suffer from the fiscal troubles of its weakest members. This hurts the euro as it makes it less likely the ECB will be in a position to raise interest rates if one of its member countries faces the threat of defaulting on its debts in future.”
