Mixed Day For Dollar

Wednesday was a day full of action with lot of economic announcements being made. Obviously it turned out to be a mixed day for super sensitive dollar with dollar initially losing ground and falling to 15 month low and then gaining. Dollar index which measures the value of dollar against a basket of currencies first fell to a 15 month low of 74.775 and later in the trading day increased to 75.130.The dollar increased by 0.2% against the Euro to $1.4961 later in the trading day after hitting a low of $1.5048. The dollar gained against yen to 89.84 Japanese yen from 89.77 yen. Against Swiss Francs dollar increased to 1.0086 Swiss francs from 1.0081 Swiss francs but declined against Canadian dollar to 1.0463 Canadian dollars.

There were lot of factors responsible for dollar’s dilly dally run on Wednesday. First of all Chinese government in a report  announced that its factory output has surged to a 19 month high in October thereby indicating that the world’s third biggest economy is very much ahead in the path of economic recovery. This optimistic view on economy fanned the bullish forces increasing the market appetite for higher yielding assets such as stocks and commodities and reducing demand for dollar.

Secondly the Fed again asserted the fact that it expects US economy to recover only at a slow pace .The fed also made it clear that it plans to continue with its easy monetary policy with interest rates at near zero level. Given this scenario traders had little reason to pile up dollars. Obviously why would any sensible trader accumulate dollar when he knows that the monetary policy is going to be so easy. For investors currency of a country with higher interest rate is more attractive since speculation in that currency can earn higher returns.

Thirdly dollar continued to be used as a funding currency for carry trade. With interest rates at near zero level, investors are using dollar to fund investments in more risky markets. This phenomenon pulls down the currency used for carry trade and in the current scenario is pulling the dollar down.

Later in the trading day dollar gained some ground. Probably Treasury secretary Tim Geithner comment in favour of strong dollar helped the currency.

Another important currency to experience significant fall during the day was the British pound. Bank of England governor Mervyn King comment that UK will have a difficult recovery and that central bank may buy more UK pounds pulled the pound down. Against the pound dollar increased by 1.2% to $1.6547.