The U.S. Dollar finished higher on Tuesday against a trade-weighted basket of currencies while losing ground to the British Pound and Japanese Yen. Risk aversion was high as demand for safer assets rose after China’s central bank took action to prevent the economy from overheating. This was a strong hint that it was prepared to raise interest rates and end government stimulus measures.

The GBP USD opened slightly better and advanced throughout the day following a report which showed that the U.K. trade balance narrowed.  Traders attributed the improvement to an increase in exports.

Demand for lower-yielding assets helped pressure the USD JPY.  Early last night, selling pressure helped create a new main top at 93.77.  Based on the monthly range of 84.83 to 93.77, the chart indicates plenty of room to the downside with 89.30 a potential downside target.  

The news from China helped weaken demand for higher yielding assets and consequently the EUR USD early in the trading session. Since the opening, however, the Euro was able to fight back to finish slightly better under choppy trading conditions.

A drop in demand for higher yielding assets helped to bolster the USD CHF.  In addition, traders were still expressing concerns that the recent rapid rise in the Swiss Franc versus the Euro would bring an intervention by the Swiss National Bank to the market.

The USD CAD rallied today following Monday’s closing price reversal bottom. Investors were reacting to hawkish comments from Canadian Prime Minister Harper.  On Monday he expressed his concern that the rapid rise in the Canadian Dollar would have a possible negative effect on the economy.  His comments served as a verbal intervention.  Weaker crude oil and gold also helped to pressure the Canadian Dollar today.

News that China is preparing to apply a tight monetary policy led to selling pressure in the AUD USD.  On Monday, the AUD USD surged after a greater than expected rise in Chinese imports. In hindsight, this report looks like it may have been a last second buying spree ahead of a possible interest rate hike by China’s central bank.  Similar fundamental pressure is building in the NZD USD which could send this pair to .7203 over the near-term.  

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