Dollar Finishes at 15-Week High

The U.S. Dollar finished at a 15-week high buoyed by debt concerns in Greece and the Fed’s release of more detailed plans to remove excess liquidity from the financial system.

The U.S. Dollar finished at a 15-week high buoyed by debt concerns in Greece and the Fed’s release of more detailed plans to remove excess liquidity from the financial system.

The U.S. Dollar opened the week lower after Abu Dhabi ponied up $10 billion to shore up the debt of Dubai World. This break was short-lived, however, because speculators bought on the break in anticipation of more hawkish comments from the Federal Reserve. The Dollar remained steady after the Federal Reserve released its monetary policy statement on Wednesday, but soared on Thursday following an S&P downgrade of Greece’s debt. Friday, the Dollar traded mixed as traders alternated between demand for risk and risk aversion.

Earlier this week, the Fed offered commentary on the economy, saying that deterioration in the labor market was “abating”. This statement was a reaction to the decline in the unemployment rate earlier in the month from 10.2% to 10.0%. The Fed did reiterate, however, that it will keep its benchmark interest rate at a historically low level for “an extended period”.

Bernanke and his friends also said “Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth and tight credit.” This statement can be interpreted to mean the Fed still wants to see people getting jobs, consumers spending and banks lending money.

The EUR USD finished the week sharply lower. Economic reports were largely ignored this week as traders chose to focus on the developing debt concerns in Greece, Spain and Portugal. These problems will not go away until addressed by the European Central Bank. Some traders feel that the other shoe is about to fall if Moody’s rating services decides to downgrade any of these three countries. No one is certain if there are other countries facing similar debt problems. This crisis may spread to Ireland or Western European nations. The Fed announcement is old news. Traders should pay close attention to the debt issues. Look for the situation to fester for some time and maybe even turn explosive. This could mean serious downside pressure for the Euro.

Despite efforts to hold the British Pound steady, sellers finally took control to drive the GBP USD lower for the week. Debt issues in Europe are raising concerns that U.K. banks may face exposure to bad debt. In addition, the U.K. has debt ratings issues of its own to worry about. The story that the U.K. debt rating may fall below AAA is still out there and helping to limit upside movement. Until the budget gets fixed, look to be a seller on rallies.

The weakness in the equity markets is triggered another round of carry trade reversals this week which is helped pressure the Japanese Yen. On Friday the Bank of Japan left its benchmark interest rate at 0.10%. In addition, it hinted that its biggest concern remains deflation. Overall there were no surprises in the policy statement. Look for pressure on the Yen to continue if equity markets continue to weaken. The unraveling of the carry trade could have significant consequences for the Yen.

USD CAD tried to break out to the upside, but a geopolitical event on Friday forced traders to think otherwise. Improvements in the U.S. economy seem to be spilling over to the Canadian side of the border. This means the Canadian Dollar will become more sensitive to news which affects their exports – gold and crude oil. If the Iranian takeover of an Iraqi oil field develops into something, oil prices could shoot up, taking the Canadian dollar with it.

The USD CHF was up big this week. Traders not only reacted to the possible hike in U.S. interest rates but also to the growing debt issues in Europe. Traders sold the Swiss Franc earlier in the week on concerns the sovereign debt issues in Europe would adversely affect the Swiss Banking system. Higher gold prices could save the Swiss Franc from a hard fall.

The AUD USD seems to be on the brink of falling further as demand for higher yielding assets declines. Traders pressured the Aussie this week because of the strong possibility the U.S. will begin raising interest rates. This event will trim the spread between Australian and U.S. rates since the Reserve Bank of Australia is likely to take a pause in its quest to raise rates, making the Aussie a less attractive investment.

A similar situation is facing the NZD USD. A reduction in demand for higher yielding assets is pressuring the Kiwi, but losses have been limited because of hawkish comments from the Reserve Bank of New Zealand earlier this month. This market is now in a position to test the “RBNZ bottom” at .7043. Taking out this price will erase all of the gains attributed to the hawkish comments from the central bank. With the U.S. seemingly on a path to higher rates, look for more pressure on the New Zealand Dollar.