Tuesday, January 4, 2011

Mixed Bag for Dollar

While the risk appetite that drove an index of commodity prices to a two-year high at the start of the year hasn't gone away, what's confusing some traders is the resilience of the dollar. It ought to be on the wane as investors stretch to reach incremental yield elsewhere. But with signs that the domestic economy is once again expanding and ahead of the major non-farm employment report due on Friday, there seems to be a revival in support for the dollar. Risk-off units are underperforming today as are growth-sensitive units leaving the dollar challenged only by the European currencies.

U.S. Dollar - Both the British pound and euro are making headway against the dollar and thanks to their weights within the dollar basket, its index is lower this morning despite healthy gains elsewhere for the dollar. At 79.02 the dollar index has reversed an earlier gain and is trading at its weakest level of the day although for now is finding support from Monday's low. The dollar has so far failed to suffer a growth-induced decline that many were predicting at the end of 2010 against a backdrop of blossoming economic data and rising risk-appetite abroad. Monday's ISM report showed the manufacturing sector was revving at its fastest speed in seven months as activity drove the index to a reading of 57.0 after 56.7 in November. Later today analysts predict amelioration in the drop factory orders when November data should show a milder dip. The dollar could also be finding support in anticipation of Friday's payroll data, the most crucial release of the month. Current estimates stand at 140,000 and it remains difficult to predict whether a strong outcome will promote or hinder the dollar.

Euro - The euro is trapped between an old-year peak from Friday at $1.3425 and a New Year peak at $1.3395 and recently traded up to at $1.3416 following an energy-inspired inflation shocker earlier in the day. The December CPI reading for the Eurozone came in at 2.2% and above a 2.0% estimate, although the report today carries very little gravity in the bigger picture and can hardly be expected to set off any alarm bells at the ECB. A separate report showed the negative side of extremely cold weather as German employers unexpectedly shed 3,000 workers in December at a time when analysts had forecasts a further 15,000 decline following an 8,000 drop in November. The rate of unemployment remained unchanged at 7.5%. In Spain, the number of net claimants for unemployment benefit unexpectedly dipped during the same month for the first time in five months. The number of benefit claimants dipped by 10,000 to 4.1 million.

Spanish unemployment is easily twice the Eurozone average and in October registered 20.7%. Data released in France showed a surprise decline in consumer confidence bucking expectations for a thaw. The reading of -36 followed a number of -32 in November while investors had hoped for a mild improvement to -31.

Japanese yen - The dollar rallied for a second straight day against the yen and recently traded up to �82.20 to reach its highest in five days. The dollar continues to reverse losses against its two fellow safe haven currencies of the yen and Swiss franc. The yen had strengthened into the end of 2010 even as equity prices matched gains elsewhere in the world. Japanese equities advanced once again today keeping the global trend afloat. A weaker yen is a positive for exporters. The euro made headway against the Japanese unit to �110.05 while the British pound jumped almost two yen to �128.25.

British pound - The pound surged by 0.8% against the dollar to $1.5605 but reached a session high at $1.5633 following data that showed a marginally higher number of mortgage approvals in November. Dealers lifting offers in the pound appear to be overlooking a more worrying climb in the pace of contraction of the M4 broad monetary aggregate, which fell 0.8% on the month accelerating its year-over-year contraction to 1.4%. Also driving the pound higher on Tuesday was an unexpected increase in the December PMI manufacturing report, which surged to 58.3 from a downwardly revised reading of 57.5 during November.

Aussie dollar - The Aussie appears to still be under pressure following a calming in the Chinese manufacturing PMI over the weekend that saw the pace of expansion weaken. The reading of 53.9 for December compares to a November index of 55.2. The fear that the Chinese economy continues to slacken off is chiefly behind a drop in the Aussie, which has given back the last two cents of its newfound strength to $1.0200 U.S. cents as recently as Friday. On Tuesday the Aussie was served up a minor piece of bad news in the shape of a further drop in a reading of the domestic performance of manufacturers. The AiG index fell to 46.3 after 47.6 the prior month indicating continued contraction in that sector. The Aussie also eased against the yen to �82.84.

Canadian dollar - The performance of the Aussie contrasts with that of the Canadian dollar, which is feeling the benefit of the highest prices for crude oil since October 2008. Canada is the main exporter of oil to the U.S. The Canadian dollar has appreciated mildly this morning to buy $1.0075 U.S. cents. On Friday the Canadian employment picture is expected to reflect a third straight month of net hiring among domestic employers and could show a 20,000 jobs gain.

Source: ActionForex.Com

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