Dollar down, but not out

 @ibtimes on December 18 2009 9:24 AM

The euro is back to unchanged against the greenback at $1.4355 in early U.S. trading after earlier reaching $1.4405 following an encouraging reading of business and investor confidence. However, the dollar is not giving in so easily this morning, for now at least, and appears to be fighting its way back to erase losses against other majors. In all the dollar has had a very positive week with more investors having been forced to quit short dollar plays during a week of concerns over rising risk aversion thanks to sovereign downgrades and potential vilification for a sea change to the direction of longer term yields.

Euro – The Munich-based IFO released its strongest record of business confidence amongst German executives in 17 months. The November reading of 94.7 not only improved on October’s 93.9 index value but also surpassed expectations. The IFO cited improvements in current conditions and healthy prospects for the future based upon evidence of rising manufacturing exports, namely to China.

The IFO survey helps drag up the prospects for the Eurozone where a recent slide in confidence amongst investors this week raised question marks over the potential for the economy to maintain its momentum in the face of a stiff wind from the rising euro. As welcome as today’s latest reading on the economy is, investors are not translating that into a significant relief rally for the euro. The euro did make gains against a broadly weaker yen to ¥129.65.

U.S. dollar – The dollar faces an empty data slate on Friday and there is little to drive it heading into the weekend. With a claw back against eth euro and a rise against the yen, the dollar index is indicating a minor gain for the session.

Aussie dollar is attracting some buyers at the end of a torrid week. The mix of increasing risk aversion and a less hawkish tone from the RBA likely means that monetary policy isn’t going much higher. Still investors are clearly saying today that the potential for the currency remains bright and are buying against the dollar today at 88.86 U.S. cents.

Japanese yen –The bank of Japan announced no change to its monetary policy stance overnight and left interest rates at 0.1%. It did, however, warn that it won’t tolerate price declines. The market reaction was to sell the yen and today the dollar buys ¥90.45 and it does provoke one of those questions often investors try to understand. If the premise of interest rates remaining low caused the yen to fall today, why does it rise when financial markets recoil? At such points of inflexion when risk events create safe haven demand, it is true that the yen and the dollar both go higher as investors rank their role as safety plays rather highly. Today’s largely worthless words warning about intolerance to deflation will likely spur the notion that the government’s bond purchase program will maintain even less appealing yields on 10-year bonds.

British pound – Sterling jumped against the dollar following data released by the Bank of England showing mortgage approvals rose in volume from 60,000 in October to 63,000 last month. Earlier in the week a RICS report apparently showed a bullish take for British home prices. Together these pieces of data continue to show a resumption of possible growth. Recently a spurt in inflationary pressures implies more of the same. The pound rose to $1.6173 but the euro rose to buy slightly more pounds today at 88.66 pence.

Canadian dollar – The Canadian dollar today buys 93.85 U.S. cents as investors attempt to find a floor for Canada after yesterday’s broad U.S. dollar rally. A strong rise in domestic inflation showed up to reveal the biggest consumer price rise in a eight months. However, the jump in energy prices – 14% for gasoline prices – is due to the run off of a sharp drop in prices through October last year. So the comparison to a low November 2008 base “embarrasses” the Canadian situation. Still, Bank of Canada governor, Mark Carney reiterated his commitment to frozen rates through the first half of next year.

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