The dollar continued weaker against the other majors this week, recording record lows against the Australian dollar, and 2 year lows against the Euro. The common currency draw enough support before the ECB statement this week,to reach the $1.3480 level, and well above $1.3500 psychological level on Thursday afternoon. The yen also reached an all time low against the Euro on Friday ahead of the G7 meeting. Now it is time to have a closer look to what moved the currencies this last week.
The previous week's better than expected non-farm payrolls number still captured the traders atention on Monday. The dollar was trading higher against the yen (above 119.00) and at $1.3350/Euro. Trading volume still affected price movement, with markets in Europe closed due to Easter Holiday weekend. The bank of Japan initiated its two-day policy meeting, but rates were expected to remain unchanged at 0.50%, the lowest within the world's leading
economies.
Once trading volumes were back to normal levels on Tuesday the dollar started to lose ground against the Euro and British pound. Tensions with China over copyright infringements put pressure on the Greenback. China has the world's largest currency reserves, and as a retaliation measure to a US complaint at the World Trade Organization, may decide to lower their dollar reserves in favour of other currencies. The yen stayed at low levels after BOJ kept the borrowing costs at 0.5%. The carry trade has resumed this last few weeks, and the bank's decision only offers more support to this practice. Carry trades refers to the practice of borrowing the yen at low cost and reinvesting it in higher yield instruments. The stock market crisis in late February affected the carry trades, the Japanese currency appreciating towards the 116.00 level against the dollar.
Wednesday trading was mixed all morning, as the market was in waiting mode for the mid-day publication of the FOMC minutes. Later in the afternoon the dollar was higher against the Euro and Sterling as the FOMC minutes reconfirmed inflation concerns for the near future. The chance of a FED rate cut in the first half of the year diminished Wednesday. Earlier in the day, the Sterling posted consistent gains after news of a tax exempt measure in case of the repatriation of foreign profit in the UK.
Thursday the ECB left rates unchaged at 3.75%, but still hawkish comments on behalf of the Central Bank's President, Jean Claude Trichet, boosted speculation that the borrowing cost in the European Union will reach 4% by the summer. The expression "strong vigilance" was replaced by "monetary policy stays on the accommodative side", signaling rather a June rate hike, instead of May, as previously expected. The euro topped 1.3500 against the dollar, reaching all time highs against the yen.
Friday morning the dollar recovered briefly from previous losses after the Commerce Department reported a narrowing to $58 billion for the month of March trade deficit. The PPI figures came out close to expectations and consumer confidence declined in the previous month. The yen returned to 119.40/dollar. Later in the morning, the Greenback's down trend
against the major currencies resumed, ahead of the weekend's G7 meeting.
The beginning of next week with carry the influence of the G7 meeting, but we particularly doubt the meeting will benefit the yen, as some traders speculated. As carry trades are back on track in the last 2 weeks, the dollar may soon climb to 120yens. For the euro we expect a mixed picture, the trading range will probably keep in between $1.3400 and $1.3550.