Thursday FX Brief: Dollar Moves Lower as Recovery Theme Grows

by: Interactive Brokers

The dollar continued to weaken overnight as it typically does in more favorable economic times. The euro extended its claw-back exercise against the greenback while the Swiss franc maintained its nascent role as anchorman of Europe by furthering its recent record peaks against the world's major pair of reserve currencies.

Swiss franc – A reinvigorated Swiss economy spearheaded by recovering exports has helped buoy the role of the Swiss franc throughout 2010. Its value has been further bolstered as wary European investors have tried to diversify away from their own currency while foreigners from outside the region have also taken long Swiss positions as an alternative to both the single European currency and the U.S. dollar. At the halfway mark this year the strengthening dollar would buy as much as Sfr1.1700 although at this time a year ago the dollar would buy Sfr1.0300. Meanwhile the plight of the euro against the franc has been worse with the single currency sinking from close to Sfr1.50 at the start of the year. But compelling arguments against both euro and dollar led by an export recovery have seen investors plow into the safe haven of the Swiss diving it to record highs against both world reserve contenders. The Swiss today moved to 93.75 centimes per dollar while almost hitting Sfr1.2400 today per euro.

U.S. Dollar – A recovery for the MSCI world index of stocks to above pre-Lehman Brothers bankruptcy level helped further boost appetite for Asian currencies offering higher-yielding alternatives to the dollar. The dollar index is weaker again today by 0.2% at 79.63. In late fixed income trading in midweek U.S. bonds pared recent losses sending yields down sharply, thereby alleviating some recent arguments that the recovering economy was supportive of the dollar as it provided more appealing yields.

Japanese yen – The Chinese yuan was once again permitted to strengthen further at the daily fixing by the Peoples Bank of China. The move continues to pour fuel on the risk-appetite fire as investors interpret a strengthening of the Chinese currency as an endorsement of global economic recovery and a viable alternative to an actual tightening of its monetary policy. Allowing the yuan to strengthen permits Chinese manufacturers and consumers to import more goods at the same cost. South Korean industrial production maintained a double-digit year-over-year pace of expansion for a seventeenth straight month. At the same time its central bank raised its forecast for the nation’s current account surplus. Buyers emerged once again for Asian currencies across the board helping to also boost the value of the Japanese yen against the dollar to ¥81.41 overnight while it also surged per euro to ¥107.60 for its weakest in more than three months. The euro has subsequently rallied in early morning trading in New York to ¥108.30.

Euro – The euro is extending earlier gains towards a two-week high having breached $1.3275. The only data point to support the move is merely an excuse. Italian business confidence recovered to a three-year high during December, while producer prices accelerated to a 4.1% annual pace. Markets remain thinly traded allowing large orders to create significant waves by bullying prices higher or lower.

British pound – Another example of exaggerated market moves was evident in the performance of the pound on Thursday, which for no apparent reason cratered from $1.5536 to $1.5412. Market sources claim that some corporate players are sweeping the decks and squaring positions ahead of year end. The pound weakened per euro to 85.75 pence.

Aussie dollar – The Aussie knocked on the door at $1.0200 overnight before easing in European trading. The unit slipped to $1.0132 ahead of U.S. initial claims. The ongoing gain for Asian currencies continues to be driven by the theme of a recovering U.S. economy.

Canadian dollar – The Canadian dollar is keeping up the pressure on its southerly neighbor and is on the rise again this morning. The unit today buys $1.0003 as commodity prices remain firm.