Dollar falls against most major currencies

Tom Tong27/Sep/2011Currency Updates

USD

The dollar extended declines against the euro and fell against 15 of its 16 major counterparts. Spot gold rallied 1%, snapping four consecutive sessions of losses as a weaker dollar helped battered commodities stage a comeback.

Hopes for an expansion of the European Financial Stability Fund, and the financial rescue vehicle’s ability to avert a euro zone debt crisis, have seen investors putting some investment risk back on the table since Monday.

Some believe that due to last week’s gloomy outlook for global growth from the International Monetary Fund and World Bank that this has caused an exodus from risk assets such as equities and commodities and the main beneficiary of this this repositioning has been the US dollar. This flight to the dollar comes despite the huge structural problems facing the United States, which has the world’s largest national debt and a huge trade deficit with China. The only reason that the dollar has benefited is that no other real alternative safe haven exists. The other traditional safe havens – the Japanese yen and the Swiss franc – have been taken out of play by official Japanese and Swiss intervention to halt their appreciation.

GBP

Yesterday we saw Ben Broadbent deliver his first speech since joining the MPC. Considered a generally hawkish member he claimed that it is not monetary policy that has seen the depreciation of GBP over the past few years but instead the need for the UK to rebalance towards tradable goods and away from non-traded goods and services.

It seems that he is relatively supportive of the fact that the MPC will begin another round of quantitative easing and that despite high UK inflation the Bank of England is going the right way about their regime as inflation expectations and pay growth remain stable.

No data of high significance out in the UK today with just the CBI distributive trades survey which is expected to fall in line with expectations and match the previous figure of -14%.

EUR

The euro dropped against the dollar and yen on Monday, with investors sceptical that fresh efforts by European policymakers would be enough to stem the debt crisis.

The Euro, earlier in the day, strengthened due to a better than expected sentiment survey and an understanding that there would be more support from the European Central Bank it hit a session low in New York trading after data on new single-family U.S. home sales that was dismal, though in line with expectations.

The European Central Bank may restart covered-bond purchases, reintroduce 12-month bank loans, or even cut benchmark interest rates. Other proposals included strengthening big European banks that could be hit by any defaults on national debt obligations, and boosting the size of the Eurozone bailout fund. No Grand plan of action had been agreed. The European Commission, the European Central Bank and the International Monetary Fund (IMF) are due in Athens this week to review Greece’s progress in cutting its debt levels.

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Written by Tom Tong

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