US Dollar Nears 4 Yr High Against the Yen on Strong Carry Trade Demand (page 1 of 2)

US Dollar

When currencies behave very differently against the US dollar for days at a time, it tells us that not only is the direction in the market unclear, but there are also counteracting forces preventing the currency from moving in one direction. Over the past week, we have seen the US dollar fail to rally against any major currency except for the Yen despite strong US fundamental data and falling oil prices. Sovereign demand for Euros has been to blame along with an aggressive appetite for British Pounds as traders anticipate higher yield from the UK in the near future. The delay in the leading indicators report today also did not help. Due to some sort of technical error, leading indicators will now be released on Tuesday instead. Aside from the President's State of the Union Address later this week and durable goods on Friday, there is not a lot of event risk in the US. The dollar is finding some support from the intraday reversal in oil prices, but until crude makes another run for the $50 a barrel level, the impact may be limited. China announced plans to shift the usage of their foreign exchange reserves. They made it quite clear that this did not mean a dumping of US dollars, but instead, they will be using their reserves to buy "strategic resources" more aggressively. The actual impact on the US dollar will depend upon how China makes these purchases. If they buy the resources outright, the dollar could hold steady since many of these resources are still priced in US dollars. If they choose to acquire foreign companies that produce these commodities instead, their demand may actually be bearish for the US dollar. Meanwhile the Fed and BoE published their semi-annual surveys on foreign exchange activity this morning. According to the report, through the month of October, trading volume in London grew by 6 percent while trading volume in the US fell by 7.5 percent. There is no data for Tokyo but in Singapore, volume is down by 4.5 percent. Although London has long been the most active trading center for FX, this new report reveals that an increasing amount of market volatility may now be concentrated in the London trading session.

Euro

Members of the European Central Bank are continuing to signal to the market that despite the omission of the words "strong vigilance" from ECB President Trichet's comments earlier this month, they still plan on delivering another interest rate hike this quarter. The comments made by ECB members Gaspari and Weber were statements that we have heard before from other ECB officials. Gaspari said that interest rates remain accommodative while Weber saw upside risks to inflation that could threaten price stability. Comments such as these is helping the Euro stay bid against the US dollar, but not giving it much additional momentum. The only piece of data released this morning was German producer prices. PPI growth in the month of December was flat, which means that the inflation risks that ECB officials are worried about are likely related to the higher prices brought on by the VAT tax. The main focus in the Eurozone this week is the German IFO report due on Thursday. If German business confidence is able to hold onto its 16 year high, it could help the EUR/USD break out of its trading range. Such strength is not completely out of the question since the Euro has tumbled, oil prices have fallen while the stock market climbed to a six year high. Meanwhile Switzerland reported PPI numbers this morning. Like in Germany, producer prices were flat in the month of December.