Dollar Sinks, Touching or Breaking Several Key Thresholds

October 14, 2010

The dollar has weakened 0.8% against the yen, euro, pound and Swiss franc.  It has also lost 0.5% against the Australian dollar, 0.3% versus the Canadian dollar, and 0.2% against the Chinese renminbi.  The kiwi is steady.

The dollar sank to another 15-year yen low of JPY 80.89.  The euro got as high as $1.4123, 19% above its June 7 low.  The Canadian dollar briefly strengthened through USD unity to touch CAD 0.9977.  The Aussie dollar reached USD 0.9997, and sterling touched a new high for the year of $1.6069.

Singapore’s semi-annual exchange rate review produced a surprise decision to allow speedier appreciation of the local currency.  The Monetary Authority of Singapore targets the exchange rate against a trade-weighted index in lieu of setting an interest rates.  This is how it conducts monetary policy, so today’s move is essentially a tightening of credit policy in response to higher inflation.  An initial tightening had been undertaken last April.  The S$ has risen over 8% against the greenback this year including 0.7% today.

The Bank of Korea, in contrast, today announced no change in its 2.25% seven-day repo rate, surprising some analysts who had been forecasting a rise to 2.5%.  This decision matched those on September 8 and August 12 after an initial 25-bp increase implemented on July 9.  Inflation has climbed to 3.6% from 2.6% earlier in the summer, but bank officials are concerned about the potential drag of a rising won on Korea’s economy, which grew more slowly in 2Q than 1Q. 

A rumor circulating in Asia has the U.S. and China making a deal in which the Fed tempers new quantitative easing, while Beijing in turn permits the yuan to climb more rapidly.  Such a deal handcuffing the Fed’s flexibility and independence seems implausible. 

Several Asian equity markets performed very well today despite currency market turbulence.  The Nikkei advanced 1.9% even as the yen broke through 81/USD, and markets closed up 1.7% in Australia and Hong Kong, 1.3% in Taiwan and South Korea, 1.0% in New Zealand, and 0.2% in China.  Stocks in India and Singapore faded 0.9% and 0.2%.  European bourses are mixed, with a rise of 0.5% in Germany, a drop of 0.4% in Britain and no net change thus far in France.

Gold rose 0.5% to $1380.30 per ounce and hit another record high.  Silver ($24.44 per ounce) touched a three-year peak.  Oil prices moved up 0.7% to $83.39 per barrel ahead of tomorrow’s OPEC meeting in Vienna where production quotas are expected to be kept unchanged.

Ten-year sovereign debt yields in Japan and Britain are unchanged.  The 10-year German bund firmed one basis point.

Bank of Japan Governor Shirakawa on the eve of the regional economic report observed that long-term Japanese interest rates have fallen since the BOJ eased policy recently.  Japanese domestic corporate goods prices were steady in September and posted a 0.1% on-year dip.  Non-ferrous metal prices rose 1.4%, offsetting a 2.2% decline in oil prices.  Export and import prices respectively fell by 0.5% and 0.1% last month.

New Zealand’s manufacturing purchasing managers index edged down a tenth of a point to 49.2 in September from 49.3 in August, 49.9 in July, and 56.2 in June.  New Zealand retail sales were flat in August after a 0.4% drop in July.  Analysts had expected July’s decline to be reversed.

Consumer price inflation expectations appear to be rising in Australia according to a survey of 12-month projected inflation, which printed at 3.8% in October after 3.1% in September and 2.8% in August.

The European Central Bank released its October issue of the monthly Bulletin, reiterating the remarks made by President Trichet last week.  Other ECB members like Germany’s Axel Weber have been even more hawkish than Trichet.

Finnish consumer price inflation picked up to 1.4% in September from 1.2% in August.  Spain’s CPI accelerated to an on-year 2.1% gain in September from 1.8% in August.

This is a busy day for the U.S. data calendar: producer prices, weekly jobless claims, and trade figures.  Canada also will be reporting trade statistics.  Central bank rate decisions are due in Turkey, where no change is anticipated, and Chile, where a 25-bp increase seems likely. 

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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