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• US Dollar Edges a New Low against the Euro as the Deficit hits a 12-Year High
• British Pound Rallies after BoE holds Rates at Record Low, Maintains QE
• Canadian Dollar Bolstered Despite Central Bank's Concern Over Currency
• New Zealand dollar Rallies on a Cautious RBNZ Rate Decision

US Dollar Edges a New Low against the Euro as the Deficit hits a 12-Year High
It was a busy day for the US dollar. A wide range of economic indicators and exogenous event risk had its impact on the meandering currency; but its collective influence is still struggling to produce a meaningful mix of trend and momentum. Nonetheless, the world's most liquid currency set a new low for the year against its primary counterpart - the euro. Whereas some of the majors were hesitant to follow this pair's guidance in earlier weeks, the others ended up capitulating today. The pound cleared 1.66 and set a new monthly high, USDJPY edged to lows not seen since February, and the New Zealand dollar charged ahead for the biggest advance against the benchmark currency. However, we still have to take account of the moderating pace.

What are the fundamental drivers that are maintaining direction but coming up short on follow through? With the financial markets stabilizing and global economy climbing out of its recession, a focus on yields and long-term returns has put the dollar in a bad light. Over the past few days, the three-month US Libor rate has extended its decline to fresh record lows. Now at 0.2997 percent, the dollar is a more attractive funding currency in the reemerging carry trade than either the Japanese yen (0.3663 percent) or Swiss franc (0.3050 percent). As for the potential of higher returns later down the line, Fed Chairman Bernanke's vow to keep rates unchanged until the middle of next year means more reactive policy groups will take to a hawkish policy after confirmation of positive growth and thereby bolster the premiums over the US rate. Along with increased regulation and what will likely be a more gradual economic recovery than many others, the outlook for yields is bleak.

In the meantime, today's event risk was net bearish for the currency. The top indicator was the July trade deficit, which expanded more than expected to a six month high $32 billion. Statistically, the 16 percent increase in the shortfall was the biggest in over a decade; and the details of the report show the record-breaking 4.7 percent jump in imports was heavily influenced by the ‘cash-for-clunkers' program leading manufacturers to buy automotive parts. Other indicators that didn't receive as much press - but are just as fundamentally influential - include the bigger than expected drop in first time jobless claims to 550,000 through the week of September 5th, a US Census Bureau report that reported the poverty rate hitting an 11-year high through 1998, and RealtyTrac's release showing foreclosures held near its record pace at a sixth month at above 600,000. Finally, the day was rounded out by commentary from policy officials. Atlanta Fed President Lockhart commented in the afternoon that the trend in national debt was unsustainable and would have to be addressed soon. Treasury Secretary Timothy Geithner echoed similar sentiments in his testimony before the TARP Oversight Panel where he said it was time to start wind down some of the excess rescue programs. However, he did suggest that some programs would likely be extended beyond the December 31st expiration.

Related Article: Dollar Struggles as a Return of Liquidity Redoubles the Focus on Deficits, Growth

British Pound Rallies after BoE holds Rates at Record Low, Maintains QE
Though neither market participants nor economists were expecting a change to the Bank of England's benchmark rate this morning, the policy authority's announcement was worth a significant rally for the pound. The rate decision passed exactly was expected: the benchmark lending rate was left unchanged at its record low 0.50 percent and the purchasing program was similarly untouched at 175 billion pounds. However, it was the confirmation that quantitative easing would be held at the same level that offered some level of relief for pound traders. As a gauge for timing the central bank's eventual policy shift, we have to look at the unorthodox policy as that will be reduced long before rate hikes are discussed. Recalling the minutes from the previous gathering, there was a minority vote (which Governor Mervyn King was a member of) to increase the asset purchasing target to 200 billion pounds. When the minutes for this decision are released, we will see whether any MPC members are still pushing for such a move. Another bullish facet of this report revolved around speculation that the BoE would cut its rates on commercial bank deposits to force these institutions to lend. Not taking these steps perhaps suggests the economy is in better shape.

Related Articles: British Pound Tips Higher Following BoE Rate Decision

Canadian Dollar Bolstered Despite Central Bank's Concern Over Currency
The Canadian dollar was another currency that would appreciate on what seemed to be an uneventful policy decision. The Bank of Canada held its overnight rate at 0.25 percent - as was heavily expected by all those parties weighing in - but the real interest was in the commentary that would accompany the vote. Taking a page from the Fed's book, the authority reiterated its policy to keep the benchmark at its current low until the second quarter of 2010. However, the contrast comes in with the contingency that the inflation does not develop. This essentially keeps the door open to earlier rate hikes while simultaneously encourages confidence among consumers and businesses that the BoC is supporting the recovery effort. Furthermore, the statement relayed a bullish adjustment to the economic outlook whereby officials saw stronger growth through the second half of this year than was originally predicted back in July. This held far more weight than the concerns about a rising Canadian currency choking growth as the central bank has not acted to halt the loonie's appreciation.

New Zealand dollar Rallies on a Cautious RBNZ Rate Decision
Completing the round of rate decisions over the past 24 hours, the RBNZ announcement early in the Asian session was also a source of strength for its native currency. The same, general bearish tone was present here as it was with counterparts. Governor Bollard warned that the kiwi's rise could stifle the recovery and that the benchmark would be held at low levels until late into 2010. However, speculators are clearly discounting these warnings with Credit Suisse overnight credit swaps pricing in 100 basis points of tightening over the next 12 months. What's more, Bollard's statement notably omitted his June/July warning that rates could be further reduced rather than be kept at current levels.


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Written by: John Kicklighter, Currency Strategist for DailyFX.com
E-mail: jkicklighter@dailyfx.com