The US dollar climbed back from yesterday’s lowest levels of the year against the euro after monetary sources in Asia said they would keep buying U.S. Treasuries even if the U.S. credit rating were to be cut. The remarks helped to stem the dollars 7% fall since the beginning of May.
Traders viewed the comments as an expression of support for dollar-denominated assets from the nations that control about half of the world's currency reserves.
Some of the dollar's slide in past weeks has been attributed to speculation that the U.S. credit rating may be downgraded, a move that may prompt nations to diversify their foreign reserves away from U.S. Treasuries.
The comments by the monetary sources in Asia came after a visit by U.S. Treasury Secretary Timothy Geithner to China, the world's biggest holder of Treasuries, during which he assured Beijing its U.S. investments were safe because Washington is committed to a strong dollar policy.
Creating some waves for the USD yesterday were comments by Russian President Dmitry Medvedev who said the world's biggest emerging markets may discuss the idea of a supranational currency given a changing perception of the U.S. dollar because of weakness in the country's economy.
Markets await today’s comments from Federal Reserve Chairman Ben Bernanke, who will speak before the House of Representatives Budget Committee. The market is waiting for clues on whether the Fed will increase or speed up purchases of longer-dated Treasuries to keep down interest rates.
The euro fell from recent 6-month highs as markets await the European Central Bank meeting on Thursday. Key info they are looking for are: projections of euro zone economic output and inflation for this year and next, which could show scope for further policy easing. It is likely that ECB rates have reached their lowest point and would remain unchanged until at least the end of next year.
Though questions remain on the chances that rates could fall further, some ECB policymakers have said they are unwilling to go below 1% but President Jean-Claude Trichet refused to confirm last month whether rates were at the lowest limit, saying merely that they were appropriate. One in four economists polled predicted a further easing by September.
Sterling cut recent gains against the USD, though it climbed to 6-month highs against the euro after unexpectedly strong data on the services sector bolstered hopes for the economy.
The purchasing managers' index for the UK services sector surprised with a jump into positive territory that was well above forecasts and showed growth in activity for the first time since April 2008.
Sterling has been one of the main gainers during the recent rally in perceived riskier assets, partly because it is one of the currencies that performed particularly badly during the period of heightened risk aversion earlier in the year.
The BoE meeting on Thursday is eagerly awaited for fresh direction.
The Japanese yen remained range bound against the dollar. As the global economy recovers, the Japanese yen will lose ground against the dollar as investors become bolder and take on additional risk.
The Canadian dollar continued to trade within its recent range, though slightly to the downside today as equities and the price of oil sagged. Also pressuring the loonie was strength in the U.S. dollar, firmer after Asian monetary sources said they would keep buying U.S. Treasuries even if the U.S. credit rating were to be downgraded.
The Australian dollar hit a new 8-month high after data showed Australia dodged a recession, fanning speculation the Reserve Bank of Australia is in no hurry to further cut rates, at least for now.
The Aussie, which has zoomed up 30 percent since the start of March, got a boost from news Australia's economy grew 0.4 percent in the first quarter from the previous quarter, after seasonal adjustments.
The Aussie's strength is also stirring worries it may drag on Australian exports and ultimately hurt the economy.
The RBA's kept rates at 3 percent at its policy meeting on Tuesday.
The New Zealand dollar settled in at seven month highs as investors booked profits on the recent surge. The kiwi, like the Aussie, is seen as highly geared to global economic recovery and is riding a wave of market optimism.
Also lower today is the Mexican peso, as concerns about the slumping economy weighed on sentiment. The peso has been hammered since last year because of falling U.S. demand for the country's exports, which has thrown the economy into a deep recession.
Traders see the peso trading in a range between 13.00 and 13.30 per dollar in the short term.
