IB FX View

Thoughts of FOMC’s exit strategy bolster dollar to start week

Monday September 21, 2009

The dollar has come out in fighting mood on Monday. This week’s theme is once again an increase in risk aversion and that’s sent the dollar index higher by 0.8% to register a reading of 77.3 on the December futures contract. The added onus on this week’s FOMC meeting is also adding fuel to dollar purchases as investors weigh the prospects for a more central discussion for an ultimate exit strategy from the Fed’s asset purchase program joined at the hip with over-easy monetary policy.


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Against the Japanese yen most currencies are strengthening to begin the week. Japanese markets are closed through Wednesday and investors are rethinking the plausibility of a stronger yen as a result of political change at a time when the economy is in such bad shape. It would seem that some vital signs are needed first before investors will take on the DPJ’s campaign for them.

The yen fell against the dollar to ¥92.36 while it also fell to ¥135.27 against the euro. More banks are forecasting a weaker yen despite the sizeable yen appreciation predicated upon a change in the political structure recently. Currently investors are struggling to parse the words exchanged between Japan’s incumbent finance minister, Fujii and reporters. While he’s not quite flip-flopping between a strong or a weak yen approach, investors still haven’t quite been able to put his jigsaw pieces together yet.

The dollar rose against the euro to $1.4644 as stocks weakened globally. Crude oil prices along with those for gold fell as investors challenged the strengthening global growth theme apparent last week. As commodity prices limp, so too do the fortunes of the Aussie and Canadian dollars. The Aussie fell back under 86 U.S. cents for the first time since last Tuesday while the fortunes of the Canadian dollar suffered equally declining to 92.48 U.S. cents.

Sterling continues to suffer and is fast approaching $1.60 against the pound and the euro continues to chase north of 90 pence as more analysts join the bearish bandwagon that argues that the nation’s financial system remains fog bound.

Hampered by low interest rates with little prospect of any need to raise them, ongoing gilt purchases through the Bank of England and the resultant expansion of the Bank’s balance sheet, investors are mistakenly reliant on the fair-weather barometer that is home prices. Yet despite today’s Rightmove survey of home prices showing that sellers lifted asking prices for their homes by 0.6% in September after a 2.2% August decline, the pound is languishing today at $1.6177 against the dollar.

Andrew Wilkinson                                                                    

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com       

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