The dollar has continued to lose value against the euro, while rising against the pound sterling and yen. The decline in the dollar has been relatively modestly paced in recent weeks, suggesting that there is not a great deal of panic selling based on short– or long-term negative views toward the dollar.
Rather, the dollar has been slipping against the euro as investors globally have become ever more convinced that the recession is moving toward its end, to be replaced by economic recovery.
In this environment, investors are moving away from U.S. Treasury securities and U.S. government backed bank CDs toward a broader array of investments.
Some investors are moving toward higher yielding bonds, while others are converting dollars to euros and other currencies in order to re-deploy long-sidelined assets in Europe and elsewhere.
The British pound and yen have been weak reflecting more pessimistic views of the economic prospects of those countries. The dollar may continue to slip against the euro this week. The dollar carry trade definitely has been a negative for the dollar.
The absence of U.S. government action to encourage banks to increase corporate lending also has sent a negative message to the market.
Euro / Dollar
The euro may continue to strengthen against the dollar, possibly holding above $1.495 this week and moving to test $1.51. The euro rose to 14-month highs against the U.S. dollar late last week, reflecting investors’ continued shifting of assets into other currencies, in order to invest in non-U.S. assets.
This is part of a broad redeployment of assets out of U.S. Treasuries into perceived riskier markets and investments. As part of this, investors are moving into other currencies interest bearing securities with higher yielding returns.
Technically oriented traders and short-term market participants meanwhile seem content to keep testing new lows for the U.S. dollar. Continued dollar carry trade selling also is contributing to the weakening of the dollar against the euro, even as the U.S. economy is showing signs of recovery and outpacing European prospects.
Indian Rupee / Dollar
The Indian rupee could continue to shed some of its recent gains this week and move toward 210 cents - 212 cents per 100 rupee. Last week the rupee was volatile, trending lower overall toward the end of the week.
Profit-taking coupled with concerns about the sustainability of foreign capital inflows into the equity markets pushed the rupee lower. The Indian benchmark equity index, Sensex, fell 3.0% last week, settling at 16,810.81 points on 23 October.
Foreign institutional investors bought around $495.3 million in Indian equity last week, down 39.7% from $821.0 million bought during the previous week.
The rupee most likely will take cues from third quarter corporate earnings due to be released in the coming weeks. Stronger earnings reports may help stimulate more foreign investment demand for Indian equities, helping the rupee.
Sterling Pound / Dollar
The pound may move to test $1.60 later this week. Last week the pound had been rising and neared $1.67 before sharply selling off on Friday.
Market perception was that the United Kingdom economy was recovering, but the third quarter gross domestic product figure came in much lower than expected. The United Kingdom economy contracted 5.2%.
There has now been increased market chatter of a possible further expansion of the Bank of England’s (BOE) quantitative easing program and the possibility that it could lower interest rates at its next monetary policy meeting.
Recent comments from BOE officials indicate that the Bank believes the worst of weak economic conditions may be over, however. In the meantime the pound may trend lower until this view is officially solidified in November’s monetary policy meeting.
Japanese Yen / Dollar
This week the yen could continue to trade around 108 cents - 109 cents. The yen steadily moved lower last week, falling to as low as 108.65 cents on 23 October.
The yen had been expected to correct over the past several weeks, but that did not actually happen. Higher yen against the U.S. dollar has been detrimental to Japanese exports.
According to the Ministry of Finance, Japanese exports fell 30.7% during September when compared to last year. Market participants continued to reduce their net long positions, indicating a bearish sentiment toward the yen.
The Bank of Japan in its minutes stated that it may not pump additional liquidity into the Japanese economy. This may be supportive of the yen, however, as it could help create more optimism toward Japanese real economic prospects on the part of investors.
