By world market pulse team on October 09,2010
The US dollar had its worst month since May 2009 against a basket of currencies when it came under pressure after the US government released its employment data last week. The U.S. durable goods orders data also forced the dollar index to fall below the key support level of 80 points over its seven month low 79.255. Such has been the pressure around the US Dollar that even better than expected GDP and jobless data have not been able to shake off the negative sentiment dragging the dollar lower.Another factor not helping the US Dollar’s cause is the emergence of government interventions in currencies across the globe. Gone are the days when the currency of a country was regarded as a barometer of a country's economic conditions. As the global economies, business and market trends change momentum towards the east, the relationship between a country's economy and its currency is getting much more complicated as governments across the globe are assuming a bigger role in propping up the financial system and encouraging economic growth.
Although most experts agree that the drop in the dollar was mainly due to the Federal Reserve’s willingness to continue quantitative easing. An excess supply of dollars obviously leads to a fall in its value. Some traders attribute the dollar’s fall to the increase in risk appetite. This analysis does not ring true as the price of gold is making new highs, which actually signals risk aversion.
US Dollar - Chinese Yuan
Although its not just the yen but the Yuan as the depreciation of the Yuan compared to the Dollar has caused a growing tension between The U.S and China in recent weeks. The U.S is blaming the cheap Yuan for its economic issues and even financial sanctions against China have been on the cards. If these two giant economies are starting to threaten each other, the impact on the ever-slowing recovery could be enormous.
Meanwhile China's vice commerce minister has described the U.S. House of Representatives Ways and Means Committee approved bill that would let the United States apply duties on goods from countries with undervalued currencies as being "redundant". The Yuan rose against the dollar on Monday even though the central bank lowered its mid-point after nine days of stronger fixings in the face of growing U.S. pressure on Beijing to let the currency rise faster.
China is the largest foreign buyer of U.S. government debt with holdings of nearly $847 billion as of July. China's central bank meanwhile fixed the Yuan’s daily mid-point versus the dollar at a weaker level on Thursday.
China's tight leash on the Yuan is under intense scrutiny as countries around the world look to export their way back to economic health, raising concerns they will intentionally weaken their currencies to gain an edge.
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US- China Trade War:
Just days after the reports of possible currency wars between nations have been in the limelight, after the drop in the US Dollar's value was attributed to the Federal Reserve’s willingness to continue quantitative easing, Beijing's Foreign Ministry has warned that the upcoming House of Representatives bill to penalize China for not letting the Yuan rise faster could seriously affect bilateral ties between the two giant nations.
The comments come after The U.S. House of Representatives began debate on legislation to put pressure on China to let its currency rise faster, fanning the flames of a long-running dispute over trade and jobs. The measure is most likely to be discussed in the U.S. congressional election on Nov. 2, with voters worried about their jobs and a sluggish economy. The Bill if passed would open the door to extra duties on Chinese goods entering the United States, some of which are already subject to special levies.
China's Foreign Ministry spokeswoman Jiang Yu has suggested that the US Congress should avoid steps that could harm relations between the two nations with Beijing being strongly opposed to the bill. Currency and economic experts don’t expect China to take things lying down and might be forced to retaliate if the bill is indeed signed into a law by President Obama. China Meanwhile has adopted a wait and watch approach as of now, but the if the statements coming out from Chinese sources are a barometer of the Chinese mindset, then we might be just sitting at the transition of currency wars into an ego and Trade war.
Obama and Chinese Premier Wen Jiabao had earlier discussed the issue about China's currency and huge trade surplus on the sidelines of the U.N. General Assembly last week.
US Dollar- Japanese Yen:
After the Japanese government's intervention in the currency markets by weakening the Yen for the first time in six years, the counter strike from the Dollar came when the FED announced the readiness to introduce a new round of quantitative easing to boost the economy. After the latest move, Japanese experts have suggested that the dollar/yen might get caught between caution over another intervention by Japanese authorities and possible dollar selling by Japanese exporters ahead of the end of the first half of Japan's fiscal year.
The Us Dollar meanwhile got to within 30 points of the previous low yesterday before rallying as traders remain reluctant to push their luck with the Bank of Japan, ahead of today’s US ISM figures for September. The dollar is especially vulnerable to the vagaries of good and bad US data and a bad ISM number will in all probability see the dollar re-test and take out last months lows, and make a fresh 15 year low.
Early indications meanwhile suggest that these US dollar declines look set to continue for now as we head into a new month, and the final quarter of 2010, as the US dollar index heads back towards levels last seen in January this year.
For more Forex Currency Trends and research articles visit http://Worldmarketpulse.com
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