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Dollar dips as market sees narrower yield gap
By Steve Johnson
Published: March 30 2006 11:53 | Last updated: March 30 2006 11:53
The US dollar fell in European morning trade on Thursday as the market appeared to reassess the impact of Tuesday’s Federal Reserve monetary policy statement.
The greenback initially rose on the back of the statement, which cleared the way for the Fed to sanction its 16th straight quarter-point rate rise in May, which would take short-term US rates to 5 per cent.
However the market was divided on Thursday as to whether this would represent the peak of the cycle for US rates. One thing that does seem clear is that, with US rate hawks only seeing at most a further two hikes after May, and most on the market expecting three further eurozone rate rises by December, the gulf between US and eurozone rates is more likely to narrow than widen this year.
Although this was known to the market before Thursday, it appeared to be the driver behind a modest sell-off in the dollar, which saw the currency fall 0.4c to $1.2069 against the euro, Y0.4 to Y117.34 against the yen, 0.35c to $1.7383 against sterling and 0.5c to C$1.1662 against the Canadian dollar.
Some also drew attention to comments from Sultan bin Nasser al-Suwaidi, the governor of the central bank of the United Arab Emirates, who said the bank would meet next week to decide whether to increase the proportion of its reserves held in euros from 2 to 10 per cent.
“Maybe we will come to the conclusion that the euro will appreciate over a period of nine months,” he told Bloomberg.
Although the UAE only has around $23bn worth of reserves, any suggestion that central bank reserve diversification out of the dollar is back on the agenda could weaken the greenback.
“Although the potential shift in reserves by the UAE does not represent a huge amount on its own, if this becomes a trend throughout the region it will have a significant impact on FX markets,” said Hans Redeker, head of currency strategy at BNP Paribas.
“The renewed market speculation regarding reserve diversification will likely put the dollar under renewed pressure, allowing euro/dollar to rebound once again.”
The slightly more dovish take on the future path of US interest rates allowed some of the higher yielding currencies that have suffered from a partial unwinding of carry trades in recent weeks to stage a partial fightback.
The Australian dollar rose 0.6c to $0.7127 against the greenback and Y0.45 to Y83.67 against a solid yen, itself buoyed by the Nikkei 225 equity index closing above 17,000 for the first time since August 2000. The New Zealand dollar rose 0.4c to $0.6086 to its US namesake.
Even the Icelandic krona, which has been given the cold shoulder by investors for the past month, staged a modest comeback, firming 1.4 per cent to IKr70.31 to the dollar after the central bank raised Icelandic interest rates by a larger-than-expected 75 basis points to 11.5 per cent in an attempt to curb inflation and bolster the krona, which had fallen 17 per cent from its January high.
