April 28, 2011 / 12:39 AM / 7 years ago

Punch-drunk dollar struggles to get off the canvas

SYDNEY (Reuters) - The dollar wallowed at three-year lows against a basket of currencies early in Asia on Friday and remained on track for its biggest weekly fall in 14 weeks, though selling pressure eased as bears were already very short.

Sentiment for the U.S. currency took a hit this week after the Federal Reserve assured it was in no hurry to tighten its ultra-loose monetary policy, a move that gave investors the green light to keep using the dollar as a funding currency to buy higher-yielding assets.

This should persist as long as greed continues to trump fear, said Michael Woolfolk, strategist at BNY Bellon.

“The likely indicator of a reversal in the USD’s (mis)fortunes is global equities. A sustained bout of profit taking would assuredly spillover into foreign exchange markets, with the EUR and AUD returning back to earth,” he added.

World stocks, as measured by MSCI .MIWD00000PUS, has rallied some 5 percent in the past two weeks, reaching their highest level in three years.

Vindicating the Fed’s cautious stance, data on Thursday showed the U.S. economy grew less than expected in the first quarter and initial weekly jobless claims rose more than forecast.

The dollar index .DXY, which tracks its performance against a basket of major currencies, was last at 73.065, having plumbed a three-year low of 72.871 on Thursday.

It is down 1.4 percent so far this week, the biggest fall since the week ending January 22, bringing it closer to a record low of 70.698 plumbed in March 2008.

The euro traded at $1.4838, not far off a 16-month peak of $1.4881 set on Thursday. First resistance is seen at $1.4905, a peak from December 7 2009, ahead of the huge $1.5000 barrier.

The Australian dollar stood at $1.0931, still within easy reach of a 29-year peak of $1.0948. Option barriers around the major $1.10 level could cap the currency for now.

Compared with the steep falls against other currencies, the dollar has held up reasonably well on the yen in the past few sessions. It last traded at 81.50 yen.

With the Bank of Japan keeping interest rates near zero as well, the Japanese currency is also a favorite funding currency.

Trading in Asia is expected to be subdued on Friday with Japanese financial markets shut for a public holiday. UK markets will also be closed for the royal wedding.

On Monday, many centers in Asia will be shut for the Labour Day holiday.

But BNP Paribas analysts warned there is still plenty of potential for market volatility into the weekend.

“A weekend which will bring the official version of China’s PMI, and no doubt all manner of rumors ahead of the May Day holiday of fresh China policy tightening measures,” they said.

Ahead of the Chinese data expected on Sunday, German retail sales, euro zone consumer inflation and Chicago PMI survey are due later on Friday.

Editing by Wayne Cole

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