Monday FX Brief: Dollar Weaker as Global Risks Rise After Japanese Quake

by: Interactive Brokers

Asian markets were gripped by fear overnight as the toll from the Japanese earthquake failed to steady. Stocks in the region slumped led by a 6.2% loss for the Nikkei Dow 225 index of leading companies as one after another halted production. Expectations that a flood of yen returning from deployment overseas would send the yen to a record high were countered by actions from the Bank of Japan, which was swift to expand its asset purchase plan to calm sentiment and encourage a frozen risk appetite to thaw.

Japanese yen – Coverage of the Sendai-earthquake is likely to dominate the media for the next week at least after a 33-foot high tsunami encroached inland by an incredible 12 miles devastating anything in its wake. The flooding has left 350,000 in emergency shelters and the death-toll is likely to be easily above 10,000. At its regularly scheduled monetary policy meeting on Monday the Bank of Japan pumped ¥15 trillion ($183 billion) in to the domestic money market in an effort to preempt a deterioration in corporate and household sentiment. In a ginormous effort to prevent a slump in domestic activity the Bank announced its intention to buy an array of government long and short-dated bonds along with those of domestic corporations. It also said it would buy ETFs and REITs to help provoke risk appetite among investors. The yen surged overnight to reach ¥80.61 before paring gains and turning lower on the day sending it to ¥82.45.

U.S. Dollar – The dollar index is clawing its way back from heavier losses in light of the Bank of Japan’s response to the earthquake, while it’s also lower versus the euro after signs of resolution in the 17-nation Eurozone. The dollar turned lower as risk aversion soared in the Asian session falling to its lowest in a week. The Fed announces its latest monetary policy decision on Tuesday where no change is anticipated. Inflation data is due later in the week for producers and consumers. The dollar index currently tradeds 0.25% lower at 76.48.

Euro – The euro popped higher after EU leaders appeared to make progress towards a lasting resolution for the sovereign debt crisis although ECB President Jean Claude Trichet called the outcome a temporary fix in light of the failure to remove the central bank from having to purchase government bonds in the open market. Leaders agreed to strengthen the buying power of the European Financial Stability Fund and said it could be used to buy bonds directly from domestic governments. The cost of borrowing for Greece was also reduced by way of a concession. Dealers boosted their expectation that the progress would receive official approval by the March 25 deadline and sent the euro to a session high of $1.3980. The euro also responded positively to a January industrial production report, which was stronger than forecast and accompanied by a positive revision to December data. The series rose by 0.3% between months leaving production 6.6% higher over the year. The euro rose against the yen to buy ¥114.20.

British pound – Despite a further weakening across interest rate expectations to start the new week the pound rebounded against a weaker dollar but fell to its weakest so for this year against the euro. In a speech over the weekend in California, Governor King raised the point about glaring problems associated with economic imbalances. "The current pattern of demand in the world economy is unsustainable," said Mr. King and further warned that surplus and deficit nations guaranteed political tension likely to lead to a round of protectionism. His comments were currency neutral although the pound reached an intraday peak at $1.6111 while easing per euro to 86.64 pence.

Aussie dollar – A late-Friday surge in the Aussie was unwound without ceremony on Monday as risk aversion swept across Asia in response to an escalating Japanese crisis. The Aussie had touched a four-day high late Friday while a slumping stock market in Japan caused a further rise in fear to start the new week sending the Aussie back to $1.0073 U.S. cents. It also fell to its weakest in six weeks against the yen to buy ¥82.44. In light of the drama and the likelihood of additional regional economic weakness dealers pared expectations for further increases in domestic monetary policy, which helped undermine demand for the Aussie.

Canadian dollar –The Canadian dollar has a weaker price of oil and a bout of risk aversion manifesting itself in lower stock prices to contend with at the start of the new week. The unit pared its recent strong showing against the dollar to buy $1.0123 U.S. cents.