Dollar Bounces after Initial Claims

A sixth consecutive weekly reading below the critical half million mark saw the dollar rally from earlier losses following signs Asian central banks might be switching dollar holdings to euros on the final trading session of 2009. The stronger than anticipated reading for initial claims showed a smaller measure of 432,000 people signed up for unemployment insurance during the week ending last Saturday. Investors were braced for a slight rise after last week's revised 454,000 reading but were treated to a year-end bonus indicating the lowest reading for initial claims in 17 months. The dollar snapped back sharp losses against the British pound having declined to $1.6237 while it has also curbed losses against the euro from $1.4440 earlier to $1.4383.

U.S. dollar - The dollar also rose sharply against the Japanese yen, which is at its weakest point since September 8. Currently the dollar buys ¥92.75. Japanese markets closed yesterday and remain closed through Monday. The dollar is maintaining a widening yield spread at the 10-year yield where the treasury note/ JGB spread recently moved out to 253 basis points offering significant premium for holders of longer-dated U.S. maturities.

Today's labor market data set off another round of bond market selling as evidence gathered that the U.S. recovery is taking a grip. I noted yesterday the twin forces tugging at the dollar. While today's data spurred an increase in demand for dollars, investors are starting to question the magnitude of the December rally, which has slashed the annual losses against the euro in half.

Commodity prices have had the best run since 1971 according to the 52% rise in the S&P GSC index of raw materials prices while the Reuters/Jeffereies CRB index has gained 23.6%. Each puts different emphasis on the component metals, energies, minerals and grains covered by the respective index. It's no coincidence that the commoedity markets have bucked the downwards trend for the dollar given the established inverse correlation between the two. A rising dollar makes commodity prices more expensive. Inversely a falling dollar increases the appeal of holding raw materials.

Aussie dollar - Firm commodity prices have lifted the dollar throughout 2009 after a torrid slump in 2008. The Australian dollar has gained 29% against the dollar throughout this year as end user demand for Australia's abundant resources has seen the currency firm. It's higher against the dollar once again today despite the push towards higher yields after the U.S. initial claims data. The Aussie buys 89.76 U.S. cents.

Canadian dollar - The Canadian dollar has also perked up from a slump amid thin trading conditions yesterday. Firming energy and metals prices are increasing the dollar's appeal today lifting it to 95.32 U.S. cents.

British pound - The fortunes of the pound changed in a heartbeat on Wednesday and continued into year's end. The pound is currently off its peak against the dollar and buys $1.6175. A 6% rise in home prices across the country for 2009 seems to have spurred some optimism that the muted recovery continues. The Nationwide building society noted that the prospects for real estate prices for 2010 remain uncertain.

Euro - The euro is higher at $1.44 as investors question the theory that the Fed will be as swift to act as they first thought. Heavy short positions using euro currency futures established by mid-month have been profitable and have been unwound. It could very possibly be the case that the run on the euro is now passed. This evidence of lighter short futures positions and the tone to the euro as the year ends indicates a possible closure to the view that the dollar deserves to be stronger.

Japanese yen -The yen lost more ground against the euro to ¥133.29 while the pound gained to ¥150.06.

Andrew Wilkinson
Senior Market Analyst

Interactive Brokers

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