NEWS / Foreign Exchange

The U.S. dollar weakened to levels near last week's two-year low versus the euro

The U.S. dollar weakened to levels near last week's two-year low versus the euro this morning, reversing gains sparked by a robust U.S. jobs report. As European traders returned from the long Easter weekend, America??™s currency was driven lower across the board, with some taking cues from rising U.S.-China trade tensions and caution ahead of this weekend's meeting of Group of Seven finance chiefs. US-China trade tensions have sparked in the last few days, after Washington said it would take legal action against China for failing to stop widespread piracy and counterfeiting of American goods. China denounced the decision on Tuesday, saying the action would seriously damage the two countries' established cooperation. The U.S. currency also weakened against high-yielding currencies, hitting a 16-year low versus the Australian dollar and two-year troughs against the New Zealand dollar as the carry-trade phenomena dominated the currency pairs. Markets now await tomorrow??™s release of minutes from the most recent Federal Reserve monetary policy meeting for clues on the near-term outlook on US interest rates.
            
The Euro took its cues from events surrounding the dollar overnight, as markets await Thursday??™s European Central Bank (ECB) monetary policy meeting. The ECB is expected to leave rates on hold at 3.75 percent on Thursday, before raising them again this year, perhaps as early as June.

The British pound hit a three-week low against a broadly stronger euro - but rose against the US dollar - , pressured by residual disappointment in the market that the Bank of England (BoE) did not raise interest rates last week. The pound rose versus a broadly weaker US dollar as concerns about brewing tensions between the United States and China over trade and nervousness before this weekend??™s Group of Seven meeting outweighed a stronger than expected U.S. jobs report on Friday. The BoE held rates at 5.25 percent last week, disappointing a significant minority of investors who had bet on an increase and sparking a sell-off in the pound. The currency??™s losses have been capped by expectations that the BoE will raise rates soon, probably in May, and by the fact that even at current levels British rates are higher than those of many other developed countries.
       
A surge in carry trade activity and the Bank of Japan??™s (BoJ) monetary policy decision drove the Japanese yen to a lifetime low against the euro overnight.  In its regularly scheduled monetary policy meeting overnight, the BoJ left interest rates steady at 0.5 percent, increasing downward pressure on the currency as Japanese interest rates are set to stay low for the foreseeable future. Global investors are embracing the carry trade with vigor once again, in which low-yielding currencies such as the yen or Swiss franc are borrowed to fund purchases of higher-return assets. Markets are cautious ahead of the G7 meeting this weekend in Washington. G7 officials in the past have said yen weakness runs counter to Japan's economic recovery and warned investors they could be burned making one-way currency bets. A senior Japanese finance ministry official said some G7 officials may mention the yen at the meeting but the issue will not be a key focus of the talks.   

The Canadian dollar extended its recent three-month high against the U.S. dollar on Tuesday as America??™s currency gave back its earlier data-driven gains. With oil prices steady and the Canadian data calendar empty, the Canadian dollar took its cues from its U.S. counterpart, rising to its highest level since December as the U.S. unit gave up gains from last week's strong U.S. jobs data. Oil prices were steady, but have declined over the past week as geopolitical tensions have eased following the release of 15 British sailors and marines held by Iran. Markets expect further gains for the Canadian currency, as domestic economic signals and strong U.S. data is expected to continue, which is positive for Canada due to the close trade ties between the two countries. No Canadian data is due during the session, but the market will be looking ahead to March housing data due on Wednesday.
  
The Australian dollar continued its rally against the dollar overnight, as the Bank of Japan??™s decision to keep interest rates steady lent support to its high-yielding Australian counterpart.
           
The Mexican peso weakened on the back of broad US dollar weakness this morning, despite a rally in Mexican equities. Mexican stocks jumped on Tuesday, driven by big gains in Cemex after Australia's Rinker recommended its shareholders accept the Mexican firm's $14 billion bid for the building materials company. The benchmark IPC stock index rose 0.72 percent to 29,846 points, while the peso currency weakened 0.39 percent. Cemex, which operates in more than 50 countries, said its revised takeover offer - the biggest ever by a Mexican company and the second-largest in Australian corporate history - was its final offer in the absence of a rival bid.

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