Published On: Sat, Oct 27th, 2012

US Dollar Reaches Four-Month Peak

On Friday, the United States dollar rose to a four-month peak against the Japanese yen. Many expect that the Bank of Japan will enact new fiscal easing policies at their meeting next week. If they do, the dollar’s recent gains could be lost. Since the start of October, the greenback has gained 3 percent against the yen. This is its strongest monthly performance since February of this year. Treasury yields in the United States managed to reach a five-week high after the United States Federal Reserve Bank chose to stick to its current monetary policy.

Safe Haven Competition

Both the United States dollar and the Japanese yen have competed over the years as the world’s safe haven currencies. The low-yielding currencies are extremely sensitive to any movement in yields of United States or Japanese bonds. Generally, investors will sell off a low-yielding currency in order to buy a higher-yielding currency. As bond yields rise in the United States, it makes the greenback comparatively more expensive.

The greenback reached a high of 80.34 yen on Friday. This marks its highest level since June 25. Toward the end of Friday’s trading session, the dollar was at 80.32 yen which is a gain of 0.7 percent for the day. Further advances could ultimately cause it to breach the late-June peak of 80.59 yen. Some analysts are recommending that the greenback be sold off when it reaches 80.60 yen. Overall, investors may be placing too much focus on Japan’s weakened export market because the island nation has the highest net foreign asset position in the world.

Last month, the United States Federal Reserve Bank started its third round of quantitative easing. Many expect that the Bank of Japan will launch its own asset purchasing program next week. The total size of the program is speculated to be 10 trillion yen. If this happens, it will be the second consecutive month of fiscal easing by the Japanese government.
By the end of Thursday, the euro was trading at 103.95 yen. This is a 0.4 percent increase for the day. It is still below the five and a half month high it reached earlier in the week of 104.59 yen.
US Data Points to Gains

In the last week, the release of economic data from the United States has pointed to signs of growth in the world’s largest economy. New orders for long-lasting manufactured goods rose in the month of September while claims for unemployment benefits dropped. Investors are looking ahead to the gross domestic product report to see if the United States is poised for more growth. Top analysts believed that the GDP for the globe’s biggest economy could top 1.7 percent for the third quarter. The recent release of the GDP report by the United States Commerce Department shows a much stronger increase than the forecast had called for. In the United States, GDP was at 2.0 percent for the third-quarter.

The United States will still have a rough few months ahead of it. Many investors are watching the upcoming presidential elections for signs that the United States may be able to resolve its budgetary problems. If both parties in Congress cannot agree on debt reduction plans in the next few months, automatic tax increases and spending cuts will kick. Nicknamed the “fiscal cliff”, these new taxes and spending cuts could stall any advances made in the world’s largest economy in the third and fourth-quarter.

Against the dollar, the euro dropped to $1.2936. This marks its third session of declines. The euro will find it difficult to make any gains until Spain reaches a bailout decision. Weaker German business activity and sentiment hit the euro hard earlier in the week and caused it to hit a one-week low of $1.2918 on Wednesday.

At the same time, the United Kingdom’s pound beat expectations due to higher than expected GDP data. Third-quarter GDP for the United Kingdom showed that the economy is emerging from the recession. This lessens the chance that the Bank of England will enact any new fiscal policies next month. This week, the sterling advanced to a one-week high of $1.6144. Some analysts still remain pessimistic about the British economy. Added revenue from the Olympic Games could be hiding weakness in the third-quarter GDP report. The pound was last up 0.5 percent at a rate of $1.6123 versus the greenback.

Australian Currency Reserves Grow

In general, the Reserve Bank of Australia seldom allows formal intervention into the currency market. Although it has not released any changes to its current policies, it will often balance out the market by purchasing Australian dollars on the spot market. By allowing its holdings of foreign currencies to grow, the Reserve Bank of Australia is applying downward pressure on a strong Australian dollar.

Data from the last two months shows that the Reserve Bank of Australia has allowed its reserves to increase by 862 million Australian dollars. In the second quarter, this increase averaged only A$49 million per month. The stronger-than-desired Aussie has decreased the profitability of exporters and miners in Australia. Despite a fall in commodity prices and an end to the mining boom, the Aussie has stayed above parity with the American greenback since the end of June.

The last time the Reserve Bank of Australia openly stepped into the marketplace was in 2008. Amid the global financial crisis, the Australian dollar fell 40 percent in just a few short weeks. To aid matters, the Reserve Bank of Australia stepped in to protect the Aussie.

Recently, the Australian dollar was at $1.0337 versus the greenback. This is higher than the trough of $0.96 United States dollars that it reached in June. It is still off of September’s high of $1.06 versus the greenback.
Spain on Track

In a joint statement, the European Commission and the European Central Bank both said that Spain is on the correct track to fix underlying issues in its financial sector. The International Monetary Fund also believes that the nation is making significant progress in reforming its financial sector. Despite the concern over Spain, this week’s focus will be on agreements with Greece. Greece currently has debt that is higher than the target set by international lenders. Next Wednesday, European finance ministers will hold a conference call to discuss ways to deal with Greece’s high debt level.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.