The US dollar rose sharply against the yen and slightly weakened against major currencies on Thursday as some calm returned to financial markets a day after coordinated global interest-rate cuts. The round of official interest rate cuts from the world’s leading central banks on Wednesday triggered a temporary bounce in risk appetite in the markets, prompting to investors to buy higher-yielding currencies again.
The euro is up against most major currencies and also regained some ground against the US dollar. The markets had initial mixed reactions to yesterday’s unilateral central bank rate cuts. The single currency was able to gain ground against the US dollar as investors gained confidence that the European Central Bank will act as necessary to prevent further economic troubles. ECB President Trichet emphasized the bank’s willingness to take aggressive action in a statement yesterday following the 0.50 percent cut in policy rates. The market is now reacting positively to his hawkish comments, pushing up the euro.
Sterling fell to a 33 month low versus the US dollar on Thursday, with investors panicked about Britain's economic outlook after coordinated central bank rate cuts and a multi-billion UK bank bailout package. British interest rates were cut to 4.5 percent on Wednesday as the world's leading central banks acted unilaterally to try and stem what is the worst financial crisis since the 1930s. The UK bank bailout package consists of injecting up to 50 billion pounds into the country's largest banks. The Bank of England will also offer at least 200 billion pounds in short-term lending, and the UK government will guarantee up to 250 billion pounds to help refinance debt.
As extreme risk aversion receded, the low-yielding, safe-haven Japanese yen fell from a three-year high against the euro and a six-month peak versus the dollar.
With the yen falling broadly on Thursday, higher-yielding currencies received a boost as coordinated global central bank rate cuts yesterday forced risk aversion to recede in the financial markets.
The Canadian dollar fell to its lowest level since mid-April 2007 against the greenback on Thursday as investors positioned themselves ahead of heavy Canadian economic data out Friday. With the US economy flirting with recession and the global economy stumbling, the loonie has been hit hard as Canada's prospects for growth are seen dwindling. The US absorbs three-quarters of Canada's exports and around half of Canadian exports are commodities, the prices of which are falling with demand as economies shrink.
The Australian and New Zealand dollars shot higher today after tumbling in the previous session. The Australian dollar rebounded from multi-year lows against the greenback and Japanese yen after a bounce in regional stock markets helped lift some of the deep aversion to higher-yielding currencies. However, investors have now fully priced in a 50 basis point reduction by the Reserve Bank of Australia at its next policy meeting in November, with some even factoring a chance of a more aggressive 75 basis point cut next month, keeping the Aussie under pressure.
The Mexican peso recovered against the US dollar this morning from a 15 percent drop on Wednesday. Mexican Finance Minister Agustin Carstens on Thursday said the peso’s dramatic depreciation was not due to fundamentals in the economy but was instead caused by a group of banks and companies getting caught in bad bets in the derivatives market. The peso was also able to bounce back after the central bank intervened in currency markets by selling off part of the country's international reserves.
