The U.S. Dollar was down on Monday against a basket of currencies, driven by increased demand for higher risk assets. Today's weakness in the Dollar was triggered by this week-end's statement by the Group of Seven and a better than expected U.S. ISM Services Sector Report this morning.
The Group of Seven, in a prepared statement, chose to leave out comments about the value of the Dollar and instead said it was opposed to excess volatility and disorderly movements in the Forex markets.
Monday morning the U.S. ISM Non-Manufacturing Sector Report was reported better than expected. The report showed the index rise to 50.9, which was higher than pre-report estimates of 50 and up from an August figure of 48.4.
Because of the friendly nature of each news event, investors felt confident about returning to the long side of higher risk, higher yield currencies.
The EUR USD posted a strong gain on a combination of demand for higher yielding assets and technically oversold conditions. Despite the strong rally, the Euro remains in a down trend on the daily chart.
Fundamental factors continued to hurt the GBP USD, but appetite for higher yielding currencies helped to curtail losses. Do not expect a change in trend to the upside, but do watch out for strong short-covering rallies. The trend is not expected to turn up for the long run until the Bank of England reduces the amount of funding available for its asset buyback program.
The stronger ISM Report helped weaken the USD CAD on the thought that it would help boost the Canadian economy. Stronger demand for equities and commodities provided additional support. The strong rise in equities and gold had the largest influence on this currency pair. The Canadian Dollar probably would have traded much higher had crude oil shown more strength. Until demand increases and supply falls in crude oil, expect the Canadian Dollar to remain rangebound.
The USD JPY traded mixed throughout the trading session but closed lower by the end of the day. Comments from the Bank of Japan regarding a possible intervention pressured the Japanese Yen early, but a BoJ official cleared up the matter by restating that the BoJ would only act against the Yen if speculation became excessive and price levels unrealistic.
Firm demand for higher yielding assets helped to drive up the NZD USD and AUD USD. Traders were also betting heavily that the Reserve Bank of Australia would be the first major central bank to hike its benchmark interest rate. Investors are speculating that the RBA will raise interest rates by 0.25% at its meeting tomorrow.
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