Dollar aided by Japanese reassurance

The US dollar strengthened in European morning trade on Friday, continuing its bounceback from weakness in the wake of Wednesday’s disappointing balance of payments data.
The dollar was aided by comments from both Japan and South Korea that they had no plans to alter the currency composition of their foreign exchange reserves. The duo hold more than $1,000bn of reserves between them, the vast majority of which is held in dollar assets.
The greenback drew further support from comments by Wolfgang Clement, the German economy minister, who warned that “exchange rate developments”, alongside rising oil prices, were creating problems for the German economy.
Eurozone politicians have been remarkably silent about the strength of the euro against the dollar in recent months, having been vocal on the subject for much of last year. Any pick-up in verbal intervention could damp expectations that the European Central Bank is edging towards a rate hike, thereby pulling any semblance of yield support away from the euro.
The dollar firmed 0.6c to $1.3316 against the euro on Friday, as well as adding 0.8c to $1.9168 against sterling and Y0.35 at Y104.85 against the yen, as Japanese importers were probably hedging their dollar exposure further out than usual to take advantage of the yield gap between the US and Japan, with three-month rates now at their widest since September 2001.
The greenback also made headway against the high-yielding Australian and New Zealand dollar, strengthening 0.3c to $0.7902 and 0.3c to $0.7392 respectively. The antipodean duo have largely escaped unscathed from a modest liquidation of US dollar-funded carry trades in the last 10 days, sparked by a rise in US Treasury yields that makes borrowing in the US more expensive and erodes the yield differential of high-yielding currencies.
However, several of the emerging market currencies that have suffered in the sell-off held onto the gains they made in a partial rebound in the second half of Thursday’s trade. The Brazilian real traded at R$2.7185 to the dollar, with the Turkish lira at TL1.314 and the South African rand at R6.0665. The Polish zloty firmed to 4.0605 zlotys to the euro while the Hungarian forint held steady at Ft245.68.

Dollar electrocuted by the ‘current’ account deficit

Greenback’s glitters after the TICS report were washed out after reports affirmed that the buff was mostly on account of private investments and hedge funds flows and confirming that Japan, (the biggest holder of US treasuries) is reducing its exposure to the depreciating currency.
The current account gap widened more than expected (181.9bn) in the fourth quarter to a record $ 187.9bn coupled with US crude futures jumping to a record high, at around $56.63/barrel, adding to investors’ distaste with the dollar.
The single currency was also stimulated with rumors in the air that ECB would hike rates by September though the central bank was reluctant to comment on it.
Yen was bolstered overnight by the bank of Japan upgrading its assessment of the economy slightly, keeping its monetary policy unchanged. U.S. housing starts rose 0.5% last month to a 21-year high together with a robust industrial production but the joy was ephemeral for Uncle Sam as there are whispers from quite a few central banks to diversify their country's forex reserves.
Sterling also gained strongly at the dollar's expense, rising 0.9 percent to $1.9286 as soon as British Finance Minister Gordon Brown averred that he saw inflation at 1.75% this year reaching to 2% in 2006 and beyond.
Traders await today’s release of industrial production figures from the Euro zone, expected it to be up 1.3%. Technically Euro might enter into a territory of 1.3480-90 if it closes above the 1.3422 range seen earlier.

Surging US Capital inflows data rescues the greenback

The greenback made major inroads against the international currencies, bolstered by a second highest on record figure of net foreign purchases of US assets.
The data indicated net capital inflows of $91.5 billion in January, substantially higher than the trade deficit figure of $58.3 billion – an indication to substantiate the fact that US attracts more investments than its trade deficit.
Euro plunged below the 1.33 mark following the capital inflows data after briefly touching the 1.34 mark initiated by a 6-month peak in Germany’s ZEW survey reading.
Cable too felt the heat and drifted towards the 1.9125 levels following the robust US data release, inching towards the crucial support of 1.91 mark.
Notwithstanding the overall rise in capital inflows, Japanese purchases (who are the largest holders of US treasuries) of US assets reduced 1.4% - pointing a 4th decline in the past 5 months - sending doubting signals to the currency markets and suggesting that the Japanese are indeed diversifying their reserve assets.
The Yen held around the 104.50 mark in early Tokyo trade.
Separately, the comments from Saudi Arabia’s oil minister stating that he would press for supply increase had a short lived cooling effect on the oil prices, which regained the $55 per barrel mark.

Dollar gets a breather ahead of data release

The dollar jumped against the major currencies as traders pared the currency higher following its slide after the trade figures on Friday.
Euro remained unfazed by remarks from European Central Bank President Jean Claude Trichet putting down worries regarding inflationary pressures. Euro slipped to trade amid the 1.3360 levels as traders paced themselves ahead of the all-important January TICS report on capital flow.
Sterling fell below the 1.91 levels before settling to trade at 1.9150.
Markets shrugged off an upward revision in Japanese growth figures, expected to grow 0.1 per cent against the earlier 0.1 per cent contraction. Oil prices hovered close to $ 55 per barrel, but eased marginally after comments from Saudi Arabia to raise production. The outcome of OPEC meeting on the 15th, this month would decide the movement in oil prices.
Traders now turn focus on the capital flow data from the US and ZEW economic survey in the week ahead. Any shortfall in the trade deficit financing would trigger a fresh bout of dollar selling against the majors.

Dollar falls to a multi week low as deficits again haunt the market

The dollar fell to its multi weeks low after data on Friday showed that the trade deficit widened to its second highest level of $58.3b in January against an expected figure of $56.5b.
This led the market to focus yet again on the twin deficits of the US and punished the dollar for the same. With soaring oil prices- touching $55 per barrel, rising bond yields and this week’s slew of important data releases (January TICS capital flows, current account deficit, retail figures, industrial production and ZEW numbers from Germany) it appears that there seems to be further fall in store for the reserve currency.
Across the Pacific a revision in the Japanese GDP figures to 0.1 percent from an expected fall of 0.2 percent for the last quarter of 2004 boosted the yen against the greenback. But hopes that BoJ would maintain its surplus liquidity in the markets has led the traders to be cautious in selling the dollars beyond mid 103 levels.
The hawkish comments from the ECB members, due to surplus liquidity, also looks to support the single currency.