Dollar Fails to Hold Gains; Finishes Mixed

The U.S. Dollar tried to mount a rally throughout the day, but failed at the close and ended up mixed for the day against most major currencies.

The U.S. Dollar tried to mount a rally throughout the day, but failed at the close and ended up mixed for the day against most major currencies.

The EUR USD finished lower but off its lows. A late session stock market rally helped to boost demand for higher risk assets which buoyed the Euro. Tomorrow the European Central Bank meets to discuss monetary policy. Expectations are for the ECB to leave interest rates unchanged at 1.0% and call for the continuation of its stimulus packages. ECB President Trichet wants to see a solid recovery in the global economy before ending any of its stimulus plans.

Look for the Bank of England to leave its benchmark interest rate unchanged at 0.50%. Weakening fundamentals continue to keep the pressure on the BoE to maintain its low interest rate policy. Traders also expect the BoE to leave its asset-buyback program unchanged.

In August the BoE voted to increase the amount of funding available to purchase government debt. At the time, there was some disagreement among members but a weak economy changed the vote to unanimous in September. BoE Governor King is also on record calling for a weaker Pound to help improve the economy. All of this should be reiterated in tomorrow’s policy statement.

The USD JPY had a volatile trading day. After opening weaker, traders became concerned that the Bank of Japan would implement some kind of an intervention to push down the value of the Yen. This triggered a rally in the USD JPY. By the end of the day, however, buyers took over to drive the Yen higher. Demand for higher yielding assets is likely to take the USD JPY through its recent bottom at 88.23. The BoJ will allow this to take place if economic reasons weaken the Dollar and the move is orderly.

The USD CAD remains rangebound as traders cannot make up their minds as to which direction to take this market. Higher equity markets are driving up demand for higher yielding assets, but weak energy markets are limiting gains. The inability of the U.S. economy to mount a robust recovery is also keeping pressure on the Canadian Dollar because the two economies are so closely related. Furthermore, even if the Canadian Dollar did strengthen, investors aren’t sure how far it could advance without causing damage to the Canadian export market and causing concerns with the Bank of Canada.

The NZD USD and AUD USD took a breather after strong rallies earlier in the week. Expectations are for these two markets to continue to rise as long as the Australian central bank can back up its recent interest rate hike with sound economic evidence of a recovery. Traders are also expecting to see improvements in the New Zealand economy to support its recent rise. Aussie traders are already talking about another rate hike by December. The Reserve Bank of New Zealand is on record stating that it will keep interest rates low until early 2010. This could change if there is evidence the New Zealand economy is heating up.