Gold price slides 1.4% to 949 in European morning as USD rallies. The dollar index surges 1% today, after climbing 1.7% to settle at 80.73 last Friday. As the traditional inverse relationship between gold and USD has returned, sustainable rebound in USD in the coming week should put gold remain under pressure.
The dollar rises against major currency on speculations of rate hike by Fed in late 2009 and short -covering ahead of CME settlement this week. Against the euro, USD rises another 1% to 1.3827 after soaring 1.5% last Friday. Against the pound, the greenback rises for the 4th consecutive day to 1.5867 as the cable's selloff has also been triggered by the political chaos in the UK.
While our view on US' employment report is 'mixed' rather than 'strong', the sentiment boosted by the lower-than-expected decline in non-farm payrolls cannot be ignored. Traders believed the data suggested recovery will come sooner than previously expected. Treasury yields surges and the 2-year note records the biggest 3-day gain since October 2008 as the change for the Fed to start raising interest rates has increased.
The dollar gains the most against New Zealand dollar ahead of RBNZ's meeting Thursday. While the majority anticipated the central bank to keep interest rate unchanged at 2.5%, possibility for a 25 bps cut cannot be ruled out as economic outlook in New Zealand remains weak despite 572 bps reduction in previous months.
In our morning report, we mentioned that IMF may consider using Special Drawing Right to replace the dollar as the major reserve currency. Now, we would like to give a brief introduction on what SDR is. According to the IMF website ( http://www.imf.org/external/np/fin/data/rms_sdrv.aspx ), the currency value of the SDR is determined by summing the values of a basket of major currencies (the U.S. dollar, Euro, Japanese yen, and pound sterling) after their values are converted to USD terms. The SDR currency value is calculated daily while the 'currency amount' of each currency is reviewed and adjusted every 5 years.
On June 8, SDR value using current exchange rate is 1.5285. Assume the euro fall 2% while other currencies remain unchanged tomorrow, the new SDR value will become 1.5172. However, our example has oversimplified the real situation as other currencies should also change in reality.
Another problem about SDR is 'rebalancing'. As of 4Q08, 64% of the world's currency reserves are held in USD. If the SDR is to replace the dollar as the dominant reserve currency over 20% of dollar holdings in the reserve has to be sold. This would be quite complicated. Therefore, as the IMF commented, the idea of replacing the dollar is revolutionary, but would take a long time to be put in practice.
Crude oil will likely record a second consecutive fall today as dollar's rise makes the commodity look expensive. Stocks in Europe open lower. UK's FTSE 100 Index slips 1.4% to 4376.7 while Germany's DAX and France's CAC 40 lose 1.7 and 1.6% to 4988 and 3286, respectively. Economic data released in Europe were mixed. While Eurozone's Sentix Investor confidence improved more than consensus to -27 in June from -34.3 a month ago, Germany's factory orders slumped -37.1% yoy in April, significantly worse than the -26.5% decline in the previous month. Economists had forecast a -33% drop.