Greenback under pressure

Currencies Direct January 20th 2011 - 2 minute read

The Greenback fell to a two month low against the euro yesterday as speculation that the US economic recovery will remain sluggish and mounting speculation that European officials are successfully addressing the region’s debt crisis. The dollar weakened against 13 of its 16 most-traded counterparts as housing starts declined to the lowest level since October 2009 and before data later today that may show continuing jobless claims increased. The Chinese Yuan also reached a 17-year high against the Dollar as Chinese President Hu Jintao met with President Barack Obama at the White House. Meeting yesterday for the eighth time, both leaders emphasised the importance of increased trade and said their two countries can keep building commercial ties while working through differences on currency policy and human rights.

FX markets took a bit of a back seat during the day whilst attention turned to interest rates in general and monetary policies in particular. With global central banks starting to look at normalising policies and thus interest rates, traders have edged yields higher almost across the board. The next step looks likely to be the re-introduction from investors of carry trades and in order to achieve this, a funding currency must be sought. The obvious choices are the popular Yen and Swiss Franc but there are arguments for using the Dollar or Sterling as well. Could be interesting once rates start moving higher. As an aside, both Poland and Brazil continued their tightening cycle yesterday and with Chinese economic data this morning coming in stronger than expected, I would anticipate a further tightening from Beijing some time soon.

Today, the calendar is better filled compared to previous days. In Europe, investors will look out for the European Commission’s first estimate of January consumer confidence. In the US, the jobless claims, the existing home sales, the leading indictors and the Philadelphia Fed manufacturing index are on the agenda, while in the UK, the CBI industrial trends survey will be published. The EuropeanSystemic Risk Board, headed by ECB President Trichet and BoE Governor King will hold its first meeting. The visit of the Chinese president to the US also continues.

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