Better Than Expected Q 3 GDP Figures

The US dollar surrendered gains made earlier in the week as third quarter GDP figures showed that US GDP rose 3.5% better than earlier predictions of 3.3%. The unexpected gain spurred a rise in stocks and commodities and sent currency traders and investors in search of higher yielding currencies. Once again the Aussie and Kiwi dollars were the big winners gaining a full 2% against the greenback. The Aussie which has a benchmark rate of 3.25% traded at US$0.9146 after trading as high as US$0.9162 earlier in the trading session. The Kiwi dollar rose as high as US$0.7352 and last traded at US$0.7342.

Canadian Dollar Lifted by Rise in Stocks and Commodities

The Canadian dollar rose as stocks and commodities surged due to US third quarter GDP results. Benjamin Reitzes of BMO Capital Markets stated, “U.S. growth is good news for growth in the global economy and good news for commodities, so ultimately good news for the Canadian dollar.” US unemployment claims declined to their lowest in seven months but are still seen as to high to indicate a recovery. Boris Schlossberg of GFT said, “The (jobless claims) figure remains … above the 500,000 barrier and until it drops below that level the market will not be fully confident that the recovery has taken hold.”

Bank of Canada Officials Warn About ‘Loonie’s’ Appreciation

Despite skepticism in some quarters risk appetite rose across the board and put downward pressure on the greenback. Camilla Sutton of Scotia Capital Inc. stated, “Today we’ve had a reversal in sentiment across all markets as stronger GDP put risk into the market once again.” At their October 20th meeting Bank of Canada officials warned that the appreciation of the ‘loonie’ threatens Canadian economic recovery. The currency, which hit a four year low from March 9th through October 19th, has gained 27%.

The dollar advanced 0.9% against the Japanese yen trading at 91.41 after hitting session highs of 91.62.

Bad News For the Dollar

The US dollar has declined the most in a month against the euro and hit a 14 month low last week as investors and currency traders bet that the Federal Reserve will be behind the curve in raising interest rates. Dale Thomas of Insight Investment Management stated, “There’s no good news for the dollar. The underlying trend is still for a gradual recovery of the global economy and a weak dollar.” Thomas also said the US dollar will remain a “funding currency” for investors to purchase higher yielding assets.

Japan’s Finance Minister Speaks

The dollar vs. euro fell 1.2% to $1.4905 and the greenback hit $1.4968, the lowest since August 2008. The Japanese yen fell 1.2% against the dollar trading at 90.89> the yen fell against all 16 of the most traded currencies as investors and traders speculated that Japanese investors will send currency out of the country for higher returns and that the Japanese government will not support a strong currency. Japanese Finance Minister Hirohisa Fujii stated, “The shift in Japanese currency policy has broken the relationship between the yen and risk, but the boost to sentiment already looks to be fading.” He also told reporters that governments are responsible for the stability of their currencies and currencies “need to reflect the strength” of economies.

Aussie Dollar On Track For Parity With Greenback

The Australian dollar rose 1.2% last week and hit 92.70 U.S. cents and some currency experts and banks including Barclays Capital, BNP Paribas SA, Morgan Stanley and St. George Bank Ltd. Believe the Aussie dollar could reach parity with the US dollar. Australia’s Reserve Bank Governor Glenn Stevens became the first G20 banker to raise rates when he raised the overnight cash target to 3.25% a quarter percentage point increase.

BOE to Suspend Asset Purchases

The pound rose 3.2% after the Bank of England is likely to suspend asset purchase programs. The pound traded at $1.6356, the largest advance since May. According to Deutsche Bank AG, the world’s largest currency trader, the pound is ‘undervalued.’ The upcoming meeting of euro zone finance ministers in Luxembourg on Oct. 19 will address the euro’s rise against the US dollar and will likely affect currency exchange rates.

US Dollar at 14 Month Low Again!

After a slight reprieve last week the US dollar has once again fallen to a 14 month low. Factors cited were the outlook for interest rates and indecision on monetary policy. Lately the dollar has also been pressured by the uncertainty surrounding the dollar’s future reserve currency status. Investor perceptions of a recovering global economy pared safe haven demand and increased demand for commodity based currencies such as the Canadian and Aussie dollars. John McCarthy of ING stated, “The dollar is under pressure because interest rates here are the lowest in the western world and will remain low for the foreseeable future.”

Fed to Release Meeting Minutes Wednesday

On Wednesday the US Federal Reserve will release the minutes of its September policy meeting and investors and analysts are expected to closely scrutinize the document for hints of when the Fed may raise rates and reduce stimulus programs. Many investors believe that the US government is only paying lip service for a strong dollar policy and see little or no action to back up a strong dollar policy. John McCarthy said, “The (U.S.) administration is quiet and says nothing about it, so people feel they don’t desire to make any type of external stand on the dollar.”

Commodity Based Currencies Hit New High

Economic recovery expectations have reduced demand for safe haven assets and many believe that higher oil and gold prices indicate an increase in risk tolerance. Growth and commodity linked currencies such as the Canadian loonie and the Aussie dollar hit 14 month highs against the greenback. Gold reached a record high of $1,066.40 and oil futures rose slightly more than 1% to $74 per barrel. The rise in oil prices has helped the Canadian dollar which some believe may reach parity with the US dollar.

US Dollar Under Pressure

Many experts are upbeat about the prospects of global recovery. Michael Klawitter of Commerzbank stated, “Risk perception remains an important topic in the absence of a cyclical trend out of the United States. But I wouldn’t expect any serious impact on the risk perception picture when liquidity remains very ample, so in this environment commodity currencies should continue to outperform.”

Bernanke’s Remarks Help Dollar

The US dollar recouped some of this weeks losses after Federal Reserve Chairman Ben Bernanke said he was contemplating an exit strategy from quantitative easing and low interest rates. After a heavy pummeling this week the greenback pulled back from a 14 month low against other major currencies. Many investors and traders have seen quantitative easing and low interest rates as the main causes for the dollar’s weakness.

Fed May Change Policies

In a statement late Thursday Bernanke said that the Fed has the ability to change both policies but said that present policies are likely to be continued in the near future. Recently the US dollar has fallen on very weak economic data and dismal employment figures and Bernanke’s comments were seen as dollar positive. Ulrich Leuchtmann of Commerzbank stated, “Explanations by Fed officials have been helpful in clearing the air on what strategy will be taken as the economy recovers. The market is not yet ready to jump on the rate rise outlook to aggressively buy the dollar.”

Asian Dollar Demand

The dollar vs. yen rate rose 0.8% to 89.13 yen pulling back from an eight and one half low against the yen. Traders reported that dollar demand from Japanese investors helped to bolster the greenback in European markets. The euro fell to $1.4725 falling from a two week high of $1.4815 on Thursday. On Thursday ECB President Jean-Claude Trichet said that US support for a strong dollar was important. The DXY which tracks the dollar against six major currencies rose 0.4% to 76.250, pulling back from a 14 month low of 75.767.

Dollar’s Reserve Status Secure

Many currency analysts believe that some of the US dollar’s troubles come from speculation that the dollar may lose its status as a global reserve currency. Although some countries have suggested replacing the dollar as a reserve currency the dollar’s status as the world’s top reserve currency status seems secure for now.