Dollar Advances as China Reigns in Bank Loans

The U.S. Dollar advanced sharply higher on Wednesday, buoyed by the news that China was reigning in bank loans in an attempt to cool off the economy.

The U.S. Dollar advanced sharply higher on Wednesday, buoyed by the news that China was reigning in bank loans in an attempt to cool off the economy.

The availability of easy money through government stimulus and favorable loan conditions helped fuel a huge surge in the Chinese economy. The pace of the growth is a concern for central bank officials. On Thursday, China is expected to report double-digit 4th quarter GDP growth.

The Dollar also received a boost from the election of a Republican to a key U.S. Senate seat in Massachusetts. This event is bullish for the Dollar because some feel it may signal an end to excessive government spending that has been weakening the Greenback.

The combination of China’s aggressive tightening action along with the Republican victory boosted the Dollar while putting pressure on equities and commodities.

The EUR USD continued its five-day freefall on concerns over Greek budget issues. The problems in Greece have triggered an international reaction. On Wednesday, International Monetary Fund Managing Director Dominique Strauss-Kahn said Greece’s debt woes are “serious”. Without any aid from the European Union, or the European Central Bank, look for Greece’s debt issues to continue to mount leading to possible talk of default.

European officials have stood there ground about providing financial help to Greece, saying that it is not their problem to solve. They also fear that providing aid will mean other countries such as Spain, Portugal and Ireland will begin lining up with their hands out in expectations of free money.

The GBP USD traded sharply lower before settling near mid-range. Overnight Bank of England Governor Mervyn King issued a dovish comment about Tuesday’s higher than expected inflation report, but his comments were offset by more hawkish comments generated from the Bank of England minutes. The move to the downside was also softened after a report showed that the U.K. unemployment rate fell at the fastest pace since April 2007 in December.

Although the British Pound failed to form a closing price reversal top on Tuesday, it sold off, nonetheless, when a 50% support price at 1.6355 was violated. The chart indicates that 1.6175 is the next downside target.

China’s order to curtail bank loans is likely to lead to a slow down in global economic growth while putting pressure on higher yielding assets. This should help to put pressure on the USD JPY, but trading was lackluster and sideways. Traders do not seem to know whether to buy the lower yielding Yen or the Dollar. The chart indicates traders are leaning toward the long side of the Dollar with .9204 the next upside target.

The USD CHF continued to soar after it broke through a key retracement price and a downtrending Gann angle. The break in the Euro is making Swiss central bankers nervous which could lead to a surprise intervention.

On Tuesday, the Bank of Canada left interest rates unchanged, but took measures to weaken the Canadian Dollar by increasing its asset-buyback program. Weaker stocks, gold and crude oil put additional pressure on the Canadian Dollar today.

News that China was taking steps to limit loans in an effort to cool the economy helped to put pressure on the AUD USD, one of its largest trading partners. The chart pattern suggests that .9031 to .8961 is the next downside target.

In addition to the bearish news from China, the NZD traded weaker because of an unexpected drop in consumer prices. Prices fell 0.20 percent during the 4th quarter which lessened the chances of an interest rate hike sooner than expected. At this time, traders believe the Reserve Bank of New Zealand will stick with its plan to begin raising rates some time after the middle of the year. The first downside objective was met on Wednesday at .7206. A failure to hold this level could lead to a test of .7150.