US Dollar defensive on reserve concerns

06-17-2009 13:01

Markets continue to aim on the durability of the Greenback as the global reserve currency, on which the US Dollar continued its defensive position. According to analysts, the Russians were eager to discuss the necessity for a new reserve currency, while some soothing was the result of the fact that the announcement made after the conference did not refer to the US Dollar directly.

Prisoner to BRIC

Stuart Bennett, a senior strategist at Calyon, commented: “According to the BRIC (Brazil, Russia, India, and China), mainly Russia, the Greenback continues to be a convict, remarks with relation to the status of the US Dollar as world reserve currency.” Nevertheless, he stated that Russia and other developing countries, mainly China, have considerable holdings in US Dollar assets and therefore it is not very likely that they are willing to make negative comments on the Dollar and devaluate their assets.

Russian jawboning

Bennett said: “Such oratory also has a political meaning, but more like the little boy who cried wolf. If the Russian jawboning continues it could influence the Greenback less, because Forex markets begin to doubt the significance of the jawboning more and more.

Sooner raise by Fed?

According to analysts, the Dollar will be affected by speculations that the FED will clarify, after the policy meeting of next weekend, if an increase in US interest rate is still far away. US Treasury yields went up as a result of the current strength of the US figures, encouraging rumors that the Federal Reserve could increase rates earlier than estimated to prevent pressure caused by inflation.

Limited risk for upsurge in inflation

Derek Halpenny, head of global-currency research at Bank of Tokyo-Mitsubishi UFJ Ltd., commented that it is not likely that inflation will increase, while economic figures were getting better. He continued by saying that it is legitimate for the Federal Reserve to reinforce its rhetoric concerning the present monetary policy point of view.
Halpenny also said: “It is likely that the Fed’s meeting of next week will provide clarity if they will extend the period of the present interest level policy of zero percent. “The outlooks for this scenario could rise and at the same time adding some renovated hypothetical selling of the Greenback.”

Dollar weakness tempered

The weakness of the Greenback was moderated as a result of declining equity markets, which boosted risk aversion and fueled the demand for safe-haven currencies such as the US Dollar. The Greenback rose 0.3% versus the Euro, reaching a $1.3868 level, it dropped 0.2% versus the Japanese Yen to Y96.20 and fell 0.1% against the Swiss Franc to SFr1.0885.

Extreme bout of profit taking

The British Pound fell while UK unemployment rose less than was expected. Investors cashed in after the Pound Sterling faced currently a strong period. “Positioning in the British Pound has become rather exhaustive, mainly versus the European currency,” according to Adam Cole at RBC Capital Markets. “We are only facing an excessive period of cashing in, although the news flow is quite optimistic.”