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Fasten your seatbelt as dollar hits zones of turbulences
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Fasten your seatbelt as dollar hits zones of turbulences
Strong euro winds rose as it swept the poor dollar aside to 1-1/2 years lows. Volume was thin ahead of the Thanksgiving holiday and key US economic data were absent.
Analysts and traders tried to push the greenback overboard sooner by speculating that the unemployment data for October would be revised higher. However, Tom Nardone, assistant commissioner at the US bureau of Labor Statistics, took care of the problem and dismissed the rumor. The first blow came when the German business sentiment survey came out robust, sparking a broad selling of the US currency. Traders had no better to do than to cut down on risky positions before the holidays.
The strong Ifo empowered expectations that the European Central Bank would continue to hike up interest rates in the eurozone after the widely expected 3.5 percent next month. German growth was propelled to 0.6 percent by buoyant private consumption, exports, and investment.
The greenback weaknesses culminated by a host of dollar-negative sentiments that included dovish US economic data and comments from central banks in Asia and the Middle East underscoring the risk potential of keeping large dollar reserves. In an academic paper, Wu Xiaoling, vice governor of the people’s Bank of China, stated that the reserve of East Asian nations were at risk from too much exposure to the ailing dollar. The possibility that China, which held the world’s largest foreign currency reserves of more than $1 trillion might diversify out of dollar assets, spooked many investors with long dollar positions.
Good performance of the pound sterling </B>
In addition, the sharp drop in the dollar overnight rate had wrongfooted some traders in the market, prompting a bout of rapid-fire short covering and a abrupt spike in volatility. In the option market, implied volatility of 1-month to 1-year euro/dollar contracts rose sharply, indicating heavy demand to buy options in anticipation of higher prices and higher spot market levels. Against the Mauritian rupee, the dollar was trading at MUR 33.307 same as last week.
Sterling performed well, giving a lot of pleasure to investors who were happy to pick up yield in a fairly sluggish market hampered by low volatility. In the middle of the week, the pound edged higher hitting a two-year high against the tumbling dollar, supported by strong data that showed British industrial orders for November were better than expected. The industrial data hinted at increased pricing power in the manufacturing sector and the possibility of upward pressure on prices further along the chain. They also support economists’ expectation that the Bank of England might squeeze monetary policy even further.
The pound also got support by merger and acquisition news and portfolio flows. ICI sold its flavors and fragrance maker business, Quest International, to Switzerland’s Ivaudan for 2.8 billion Swiss francs. Australia’s Tattersall and Macquarie had made a bid of 137 million pounds for British amusement arcade Talarius. Against the Mauritian rupee, the Sterling was trading at MUR 66.04 yesterday as compared with MUR 64.81 a week earlier.
The low-yielding yen fell prey to low volatility in the market over the past six month, making carry trades profitable for investors and speculators. In such trades, investors borrowed yen to buy a higher-yielding currency. However, many traders expected the Bank of Japan to raise rates from 0.25 percent by the end of March 2007. Towards the end of the week, the Japanese currency firmed in mostly technically-driven sessions following the weakening of the US currency across the board. The yen was sold at MUR 29.73 as compared to MUR 29.30 last week.
<B>Major data/events this week :</B>
<B>Wednesday 29 Nov</B>: US mortgage, GDP
<B>Thursday 30 Nov</B> : EZ Cons Sent’t, GDP US jobless Claims, Core PCE
Friday 01 Dec</B> : US Core PCE, Michigan Prelim
<B>Monday 04 Dec</B>: EZ PPI
<B>Tuesday 05 Dec</B> : US Redbook, Durables
<B>Vassan Caleemootoo
Contributed by HSBC</B>
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