The U.S. dollar fell across the board against most major currencies after comments from China's central bank chief Zhou Xiaochuan released and confirmed that the bank is looking to diversify its trillion dollar currency reserves. As speculation grew that China’s central bank may buy fewer dollars in the future, Xiaochuan reiterated that there was no official change in China's long-standing diversification policy. With the Veteran's day holiday being observed by the U.S. government today, look for the market to remain fairly quite. The market will, however, look today towards Fed Chairman Ben Bernanke and ECB chief Jean-Claude Trichet as they are set to speak at a monetary policy forum in Frankfurt. Look for the dollar to remain weak as the market focuses on the diversification call form China’s central bank.
The euro rose to two month highs and broke through a new key technical level, although unable to sustain its highest level seen back on Aug. 21. Seemingly unaffecting the currency, however, was the release of the first estimate of French third quarter gross domestic product data, which came in unexpectedly flat. Analysts will look towards ECB chief Jean-Claude Trichet’s speech later today for further direction into the Euro Zone’s future interest rate outlook.
The Japanese yen gained ground against its U.S. counterpart after Bank of Japan Governor, Toshihiko Fukui stated that he was concerned about the unwinding of carry trades (where investors borrow the low-yielding yen to buy higher yielding currencies). Carry trades yesterday lifted sterling to an eight-year high and the Euro to a record high against the yen rising to 151.50. BOJ deputy governor Kazumasa Iwata also stated that he could not say precisely when the bank might raise rates again from the current 0.25 percent. Look for the yen to remain within its recent ranges as the market looks for signs as to when the BOJ will lift rates again.
Sterling gained half a percent, but remained off of an 18-month peak seen in early trading. Even on the back of an interest rate rise out of the UK, look for sterling to remain under pressure as the future course of interest rates remain uncertain in the UK.
The Canadian dollar came in higher against the greenback, but remained weak against other currencies after the head of China's central bank chief spoke about the need to diversify China's currency reserves. The loonie was also weighed down by a drop in crude oil and natural gas prices. Look for Canada’s currency to continue to track U.S. dollar movement.
The Australian dollar lifted higher, recovering from a two-week low after the U.S. dollar fell on comments from China's central bank. With soft economic data this week and a less hawkish tone from the Reserve Bank of Australia (RBA) after it raised interest rates on Wednesday, look for the currency’s gains to remain limited. The market will also look towards next week’s central bank’s quarterly policy review on Monday and wages data on Wednesday for further direction of the currency.
The New Zealand dollar remained under pressure against the major crosses following yesterday’s weak jobs data. The lackluster news reinforced expectations that New Zealand’s central bank will hold interest rates steady continuing to pressure the currency.
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