Dollar Falls versus Basket of Currencies

The U.S. Dollar closed lower against a basket of currencies as appetite for risk drove traders away from the lower yielding Dollar into the higher risk currencies.

The U.S. Dollar closed lower against a basket of currencies as appetite for risk drove traders away from the lower yielding Dollar into the higher risk currencies.

The strong trend against the Dollar was set overnight when the Reserve Bank of Australia surprised most analysts with a 0.25% rate hike. A story then began circulating that a group of nations including Saudi Arabia and China had begun secret talks to replace the Dollar as the crude oil pricing mechanism. Traders reacted to both of these news events by selling the Dollar.

The move by the RBA sent a signal to the markets that the Asian-Pacific Region may be in a better position than the U.S. and Europe to mount a strong recovery out of the recession. In addition, some traders believe the Euro Zone is in better shape than the U.S.

The story about the Dollar being replaced as the main currency for pricing oil was denied by Saudi Arabia, but nonetheless should be a major concern for Dollar traders. So far the Treasury, the so-called “Defenders of the Dollar” has not made a comment, but their usual line is “we stand behind a strong Dollar.” This plan may take years to implement, but short-term traders reacted negatively to the news.

Demand for higher risk assets drove the EUR USD higher. The European Central Bank meets on October 8th. It is expected to keep interest rates unchanged and remain concerned about the economy. ECB President Trichet has been vocal recently about central banks maintaining their stimulus plans until the global economy recovers. Because of this stance, traders expect the ECB to continue to implement its stimulus programs.

The GBP USD continued to trade weaker. Today’s weaker than expected Factory Output Report weighed on the Pound throughout the day. Losses were most likely limited by the weakness in the Dollar. The Bank of England is expected to leave interest rates unchanged and its stimulus plan intact when it meets on October 8th.

Demand for higher yielding Japanese investments kept downside pressure on the USD JPY. The rally in the Yen seemed tentative, however, as traders are still nervous about the possibility of an intervention by the Bank of Japan. The BoJ has expressed concerns about abnormal price movement and excessive volatility. There should be no problems if the Yen increases at a steady pace driven by economic reasons.

Firm energy and stock prices helped boost the Canadian Dollar. Traders are betting that higher crude oil prices will help to improve the Canadian economy. Although this currency pair is trading in a range, Canadian officials are still concerned that a rapid rise in the Canadian Dollar will hurt the export market.

The Reserve Bank of Australia hiked its benchmark interest rate by 0.25% to 3.25%. This came as a surprise to most analysts who were looking for a December hike. This move didn’t surprise speculators who were showing signs of an impending rate hike yesterday. Today’s gains may be attributed to investors already pricing in another rate hike in December.

The NZD USD piggy-backed the move in the AUD USD today. The action by the RBA is sending a signal that the Asian-Pacific Region is in a recovery. This means a better economy for New Zealand. Although the Reserve Bank of New Zealand is on record saying that it would not raise rates until early next year, the move by the Aussies may force the RBNZ to move up its plans.

James A. Hyerczyk has been actively involved in the futures markets since 1982. He has worked in various capacities within the futures industry from technical analyst to commodity trading advisor. Using W. D. Gann Theory as his core methodology, Mr. Hyerczyk incorporates combinations of pattern, price and time to develop his daily, weekly and monthly analysis. His firm, J.A.H. Research and Trading publishes The Forex Pattern Price Time Report... More

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