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FX Weekly

Dollar in the crosshairs

Thu, Oct 15 2009, 16:49 GMT
by Alpari (US) Analyst team

Alpari (US), LLC

Market Focus

•Inflation fears push Gold to record highs as the Dollar Index clings to fresh lows.
•High yielders and commodity currencies continue to outperform as investors seek to scale back exposure to the Dollar and look for higher returns in AUD, CAD, and NZD.
•RBA sparks massive move higher in AUD/USD by raising interest rates. The AUD should expect more gains to the upside, particularly versus the Dollar.

Arab oil producers had been linked with China, Japan, France, Russia, and Brazil in secret talks between the countries respective finance ministers regarding an end to dollar dominance in the oil trade. Tuesday’s article in the Independent put market participants on notice and sent the greenback firmly lower against the majors in Asian and European trading. Robert Fisk, the journalist who penned the article, states that Gulf countries plan to scale back the usage of the dollar as the reserve currency for the buying and selling of crude oil. Instead, Fisk writes that a basket of currencies will be used. The article lists the following currencies as dollar alternatives: Japanese Yen, Chinese Yuan, Euro, Gold, and a brand new, unnamed currency which will be used by members of the Gulf Cooperation Council. The process is based on a nine year plan. Although this report was deemed ridiculous by those said to be involved, it did put the dollar on the spot in terms of its relevance as a reserve currency in the long term.

Are investors and traders seeking inflation protection, or are they just riding the bullish momentum higher in Gold? It’s hard to think that any reasoning matters at this juncture as gold finished higher last week, breaking the previous record of $1,030 by closing at $1,061 per troy ounce. Call it whatever you like. Investors and traders like Gold higher. Their preference pushes the market and with little data to support a rapid depreciation in gold prices, we should remain higher in the short term. Corporate earnings and dovish statements from Fed officials added fuel to the fire as well, with nearly 75% of companies reporting higher than expected earnings. Market participants keyed on these three things as they shifted their focus outside of the United States, seeking higher returns in commodities and higher yielding currencies. However, a bit of relief came at the end of the week in the form of Ben Bernanke re-iterating the need for a pro-active Fed, one in which can be ready to act when inflationary issues present themselves to policy makers.

On the back of increased risk appetite was a decidedly lower Japanese Yen. The Yen, like the Dollar, garnered little interest from investors and traders seeking higher yield. The focus of course was on CAD, NZD, and AUD. Continued downward pressure in USDCAD after the fantastic jobs report sent the pair lower. These massive employment gains in Canada could lend some players reason to think that Canada could become the next country to begin policy tightening. The RBA raising rates amid signs of a definitive recovery in Australia sent the dollar lower for the week against the AUD as well, with losses of 4.4%. Continued enthusiasm in the Oz space regarding unemployment and rate expectations should keep the dollar firmly lower here and against the Kiwi.

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Published on  Thu, Oct 15 2009, 16:51 GMT