A halt in the Dollar Decline

Over the last month, the USD has decline precipitously in value, to the extent that the currency is approaching a two-year low against the Euro, a 14-year low against the British Pound and an all-time low against the Chinese Yuan. Most economists had been predicting this decline for quite some time, and felt it was a matter of when it would happen- not if it would happen. With the release of US GDP data indicated that the US economy grew by a healthy clip last quarter, the decline in the Dollar was brought to a sudden halt. However, the news has already begun to dissipate in the markets and will likely soon be offset by dollar-negative news in the coming weeks. The Financial Times reports:

Analysts said that, while it might be something of a surprise that the dollar had failed to derive support from Mr Bernanke’s remarks, he might be in danger of “crying wolf” over US inflationary pressures.

Read More: Dollar relieved by economic growth

A halt in the Dollar Decline

Over the last month, the USD has decline precipitously in value, to the extent that the currency is approaching a two-year low against the Euro, a 14-year low against the British Pound and an all-time low against the Chinese Yuan. Most economists had been predicting this decline for quite some time, and felt it was a matter of when it would happen- not if it would happen. With the release of US GDP data indicated that the US economy grew by a healthy clip last quarter, the decline in the Dollar was brought to a sudden halt. However, the news has already begun to dissipate in the markets and will likely soon be offset by dollar-negative news in the coming weeks. The Financial Times reports:

Analysts said that, while it might be something of a surprise that the dollar had failed to derive support from Mr Bernanke’s remarks, he might be in danger of “crying wolf” over US inflationary pressures.

Read More: Dollar relieved by economic growth

HKD could peg to Yuan

Over the last few months, the Chinese Yuan has picked up its pace of acceleration, to such an extent that it is now rising by an annualized rate of 7%. This has spurred two points of speculation: first, for how long will the Yuan continue to rise at this pace and second, will Hong Kong link its Dollar currency (HKD) to the Yuan? The answer to both questions is ‘probably not.’ The Yuan’s current rise is probably a conciliatory gesture to carping foreigners. With regard to the second question, Hong Kong is probably not likely to peg its currency

Pound continues to surge

The Pound is closing in on a two-year high against the USD en route to crossing the mythical barrier of 2 USD. Many traders and economists believe that it is only a matter of time before this threshold is breached- that it is a question of when and not if it will happen. This month, the Bank of England raised short-term interest rates to 5%, bridging the gap with US rates and eroding one of the last pillars that is propping up the USD. Once interest rates converge, many short term investors will likely shift funds out of US capital markets, and the USD will adjust to more closely reflect economic fundamentals.
Read More: Pound threatening $2 mark

China pushes reserve diversification

Every month, almost like clockwork, when China announces its new total of foreign exchange reserves, a cloud of paranoia descends on currency markets, as traders weigh the likelihood of China diversifying its reserves. This month was different, however, as this paranoia seems to have been born out by Zhou XiaoChuan, chairman of China’s Central Bank. He stated explicitly that China would *continue* to diversify its reserves, but did not specify particular currencies or investments that would be targeted. However, the consensus is that any diversification by China, regardless of the scope, would surely benefit the Euro.

“Plainly, there’s a lot of sensitivity on this issue, and as an investor, one has to respect the market’s reaction.”

Read More: China’s reserve plans keep forex market on edge

China pushes reserve diversification

Every month, almost like clockwork, when China announces its new total of foreign exchange reserves, a cloud of paranoia descends on currency markets, as traders weigh the likelihood of China diversifying its reserves. This month was different, however, as this paranoia seems to have been born out by Zhou XiaoChuan, chairman of China’s Central Bank. He stated explicitly that China would *continue* to diversify its reserves, but did not specify particular currencies or investments that would be targeted. However, the consensus is that any diversification by China, regardless of the scope, would surely benefit the Euro.

“Plainly, there’s a lot of sensitivity on this issue, and as an investor, one has to respect the market’s reaction.”

Read More: China’s reserve plans keep forex market on edge

UK Central Bank Raises Rates

The Pound has been idling near a multi-year high against the USD for several months now, but it can’t seem to break through the psychological resistance of $1.90. Against that backdrop, the Central Bank of the UK raised interest rates this week by 25 basis points, to 5%. This leaves UK rates potentially one rate hike away from parity with American rates, which seem more likely to be lowered than raised, given current circumstances. Narrowing interest rate differentials may remove the last barrier that has stood in the way of a broad-based USD decline. Perhaps, risk-averse investors will begin shifting some of their capital out of the US, and into UK and Europe, which is also in the midst of raising rates. The Financial Times reports:

The statement [of the UK Central Bank] did not give any clear signals as to the future path of UK interest rates and as such came as a disappointment to sterling bulls given the high probability that was attached to a follow-up rate rise in the first quarter of 2007.

Read More: BoE disappoints sterling bulls

Yuan Revaluation to Continue

Chinese governmental officials have been somewhat quiet about the Chinese Yuan of late, perhaps not wanting to incite certain American politicians that are trying to lead the passage of a tariff on Chinese imports. In a recent press conference, officials broke the silence by hinting that the Yuan would witness an “accumulated slight revaluation”- meaningless rhetoric which translates roughly into ‘business as usual.’ In other words, barring some unforeseen economic or financial developments, forex traders can probably expect a 2-3% appreciation of the Yuan in 2007.
Read More: China Says Yuan to Continue `Accumulated Slight Revaluation’

ECB promises “strong vigilance”

At its monthly meeting held his week, the European Central Bank (ECB) left the benchmark Euro-zone lending rate unchanged at 3.25%. However, Jean-Claude Trichet, president of the ECB, announced that the ECB would exercise “strong vigilance” in monitoring economic conditions and weighing future rate hikes. While this kind of language could be confused as rather vague and