The U.S. dollar touched multi-year lows against several major currencies this morning, as diminished expectations for U.S. interest rate cuts contrasted with prospects for monetary tightening in Europe and Asia. America??™s currency pared some of its earlier losses against the euro and sterling, but it fell against the yen. It also held near Tuesday's 17-year low against the Australian dollar. Today??™s session is relatively quiet on the economic data front, with market focus firmly on speeches by European Central Bank President Jean-Claude Trichet, European Central Bank Governing Council member Axel Weber and U.S. Treasury Secretary Henry Paulson. America??™s currency is expected to remain on the defense throughout the week, as diminishing prospects of US economic growth drive investors to non-US assets.
The Euro closed in on historic highs versus the dollar, rising to a two year high and coming close to a record peak set in December 2004. Investors continue to shift funds to Europe??™s single currency after the European Central Bank kept its benchmark interest rate unchanged at 3.75 percent last week, but suggested it was likely to raise rates in June or beyond to stem higher inflation. In sharp contrast, most economists expect America??™s Federal Reserve to cut its benchmark interest rate sometime this year, even though the U.S. central bank recently repeated its main concern remains on price pressures.
The British pound rallied to its highest level in more than a quarter of a century this morning as strong UK earnings data bolstered expectations that another UK interest rate increase is immanent. Average earnings in Britain rose by 4.6% in the three months to February, picking up their fastest annual pace in three years. The data, along with positive inflation data released earlier in the week, pushed UK interest rate futures to fully price in an interest rate hike in May, pushing UK borrowing costs to the highest of any G7 country. Markets expect the pound to continue to breech multi-decade highs against the dollar in the near-term.
The Japanese yen, which has suffered along with the US dollar due to its low-yielding status, pulled back from recent lows against America??™s currency and a record low against the euro as investors took profits on short positions. The Asian currency remains fully on the defense however, primarily as a result of weak Japanese fundamentals and a continuation of the carry trade phenomena. In official commentary overnight, Japanese Finance Minister Koji Omi stated that recent moves in currency markets reflected not so much a fall in the yen as a rise in the euro. Omi repeated then often heard official line from Japanese finance officials, stating that currency levels should reflect economic fundamentals.
The Chinese yuan traded slightly stronger after hitting a post-revaluation intraday high against the dollar overnight, boosted by talk of a Chinese interest rate hike and by a weakening of the U.S. currency on global markets. March consumer price inflation data is due on Thursday and there is a persistent market rumor that it will come in at 3.3 percent, against 2.7 percent in February. The government's decision to delay the release of the data until after stock and bond markets close on Thursday afternoon, from Thursday morning as originally scheduled, fuelled talk that authorities might want to avoid a sudden reaction to the data. A Chinese rate hike could send the spread to fresh lows, encouraging inflows that might, with central bank acquiescence, send the yuan on another leg higher.
The Canadian dollar added to its recent gains versus the U.S. dollar this morning, rebounding from early weakness as oil prices rose, helping push the currency past key levels that accelerated its move. Crude oil futures rebounded from overnight losses, sparking commodity-driven interest in the currency, but with the greenback having touched a 26-year low versus the pound and nearly a record low versus the euro, the market's focus was firmly on the U.S. dollar. The Canadian currency has appreciated four percent against its US counterpart over the past month, helped by rising commodity prices and strong economic data, which have killed talk of interest rate cuts. March inflation and February retail sales data will be released on Thursday and Friday respectively, setting the stage for next week's Bank of Canada interest rate decision. A strong data result - particularly on the inflation front - could fuel rate hike expectations, but analysts doubt the bank will make any move for the next several months.
The Australian dollar rose to highs just below fresh 17-year peaks against the U.S. currency, on speculation domestic interest rates will rise in the coming months and on firm commodity prices. Australia??™s currency has risen over eight percent in the past three weeks, making it one of the best performing currencies, after carry trades returned to favor following a bout of risk aversion. Speculation of a rate hike has been supporting Australia??™s currency, but investors are now awaiting next week's producer price index (PPI) and consumer price index (CPI) data for more clues on monetary policy. The 30-day interbank futures market is pricing a 60 percent chance the central bank will raise the cash rate to a decade high of 6.5 percent at its May meeting, up from about a 50 percent chance at the start of last week.
The Mexican peso remained sidelined for the third consecutive day against the US dollar as Mexican equities continued to consolidate after hitting record highs last week.
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