Wednesday, September 9, 2009

Dollar On Defensive On Firm Stocks, Commodities

. Wednesday, September 9, 2009

By stockOzone team

The dollar inched up off its 2009 lows but remained on the defensive on Thursday as firm shares and commodity prices helped investor sentiment, while higher-yielding currencies eased on profit-taking after their recent rallies.

Investors booked gains in the Australian and New Zealand dollars, driving them down from this week's one-year highs, but the greenback remained in sight of key levels against the yen at 91.50 yen and a chart target around $1.4620 per euro.

The dollar index, which tracks its performance against a basket of six major currencies, inched down 0.1 percent to 76.995. The index dipped to 76.803 on Wednesday, its lowest level in almost a year.

The low-yielding dollar has suffered as investors have bet on economic recovery through commodity-linked and higher yielding currencies, and analysts said there was a growing possibility it would replace the yen as a funding currency for riskier leveraged carry trades.

"Speculators and hedge funds seem to be playing a major role in the dollar's weakness," said a trader at a Japanese bank.

"But it is probably too early to say the dollar has replaced the yen as a funding currency for carry trades, and more time is needed to see how far the dollar's broad weakness will progress."

With official rates in both Japan and the U.S. close to zero, interbank rates have also been falling. The three-month dollar London interbank offered rate, Libor, was at 0.299 percent on Wednesday, lower than the three-month yen Libor rate of 0.37 percent.

The dollar held steady on the day at 92.04 yen, up from Wednesday's seven-month low of 91.61 yen on trading platform EBS after short-term players covered short positions.

Traders say options triggers are expected at 91.50 yen, and options desks have been buying dollars in option-related hedging, preventing it from falling further.

They also expect Japanese importers will be dollar buyers at these kind of levels but as September is the end of the fiscal first half the market is waiting to see whether inflows of capital into Japan will pick up.

The euro was steady at $1.4561, holding onto a 0.5 percent gain made on Wednesday when it hit a 2009 high above $1.4600. It has a key chart level at $1.4620, which is a 61.8 percent retracement of its fall from July 2008 to October last year.

The New Zealand dollar eased 0.1 percent to $0.6961, dropping from just below Wednesday's one-year high above $0.7000 after the Reserve Bank of New Zealand (RBNZ) governor said it was overvalued and after weaker-than-expected Australian jobs data.

Earlier the RBNZ left rates on hold at a record low of 2.5 percent as expected but indicated it was less inclined to cut rates again.

Su-Lin Ong, a senior economist at RBC Capital, said the central bank was likely to keep rates low for most of the next 12 months.

But given its reliance on offshore financing, New Zealand may have to follow in Australia's footsteps in 2010 and raise rates, she said.

The Australian dollar fell after data showed Australia's employment fell by 27,100 jobs in August, more than double a Reuters forecast of 12,500, although the jobless rate held steady at 5.8 percent, better than the 5.9 percent forecast.

Speculation has been high that Australia will raise rates before the end of the year. But implied rates, based on money market and swap rates, cut the chance of an October hike to 16 percent from around 30 percent before the jobs report. Even the prospect of a November hike dimmed to around 50 percent.

The Aussie slipped 0.3 percent to $0.8604, retreating from Wednesday's one-year high of $0.8669.

Later in the day, the Bank of England concludes a two-day monetary policy meeting and is widely expected to keep rates unchanged. Still, there is an outside chance it might decide to expand its quantitative easing program.

Also, the Bank of Canada meets and is expected to keep its conditional commitment to maintaining rates at 0.25 percent.

Disclosure: Author does not own any of the stocks discussed here.

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