Dollar rallies on Chinese interest hikes
20/Oct/2010 • Currency Updates•
Sterling fell broadly on Tuesday, hitting a near four-month low against a range of currencies after a weak reading of UK factory orders raised concerns about the economic outlook ahead of the government’s spending review. Data from the Confederation of British Industry showed factory orders dropped more than expected to -28 this month from -17 in September, raising some concerns about the current health of the manufacturing sector.
Ahead of minutes from the Bank of England’s latest policy meeting due on Wednesday, along with a much-anticipated announcement of the government’s public spending review, analysts said sterling was vulnerable to any signs that the UK economic recovery may be stalling. Meanwhile, BoE minutes of policy meeting earlier this month are expected to show a three-way split in voting, with policymaker Adam Posen seen voting for more QE while Andrew Sentance is expected to have again voted for a rate increase.
The safe-haven dollar rallied broadly on Tuesday as it had its best day in 2 months. Hobbled by zero interest rates and expectations of more Federal Reserve easing to come, the dollar has been under pressure since September. Analysts, however, say the expectations of Federal Reserve easing have been priced in, providing an opportunity for investors to take profits. Analysts said Geithner’s comments may mean the United States was trying to ease global tensions over exchange rates ahead of a G20 meeting in November. Analysts cautioned, however, that the dollar’s rebound may be short-lived given expectations that US interest rates will remain low relative to most other major economies.
The European common currency plummeted further against major currencies during Tuesday trading. The euro dropped to a 2-week low against the greenback and more than a 1-month low versus the yen after German investor confidence fell further in October, as finance experts expected Europe’s biggest economy to tread water in the coming six months, the ZEW economic research institute said.
Rest of the world
China’s central bank raised its key interest rates unexpectedly by 25 basis points on Tuesday in a bid to cool accelerating inflation and overheated economy. The People’s Bank of China hiked the one-year benchmark deposit rate to 2.50% from 2.25% and the one-year lending rate to 5.56% from 5.31%. It was the first tightening move since December 2007. The rate hike will take effect on October 20.
Commodity-sensitive Australian dollar tumbled after the surprise interest rate increase from China prompted investors to cut risk exposure. Investors feared a quarter percentage point rise in China’s one-year lending rate could dampen Chinese and global growth and slow the country’s voracious demand for commodities, many of which come from Australia.