USD Still Volatile; Worries Remain

The U.S. dollar failed to gain traction against the euro this morning, even though the Producer Price index number for July showed a gain of 1.2% in July. Although this reflected lower inflation than in June, it was still almost double the expected rate for July. Nevertheless, the market remains anxious regarding the pace of the dollar’s recent rally and the possibility that the dollar has moved too far, too quickly. This fear is at the heart of the dollar’s inability to break out higher – traders are assessing its current condition and evaluating what moves they should expect it to make next.

The Japanese yen rose to a three month high against the euro this morning. Heightened risk aversion, driven by the credit market crisis and the fear that major financial firms will continue to report large losses, have reduced investor demand for higher-yielding assets that were normally financed by money borrowed at low interest rates in Japan.

The Canadian dollar was treading water this morning despite news that wholesale prices rose at their fastest pace in over a year. Statistics Canada reported that wholesale prices rose 2% in June, almost trebling the rate of growth expected. The news raises hopes for Canadian interest rate hikes, but the loonie did not advance much on the news because it continues to be dogged by weaker prices of gold, oil and other commodities. Commodities account for over half of Canadian exports.

The British pound fell to a two-year low against the U.S. dollar this morning and continued its downward trend versus the euro. Bank of England policy maker Tim Beasley predicted that inflation will fall by the end of next year, fueling the ongoing speculation that interest rates in the U.K. have peaked. The pound has now weakened against the U.S. dollar for 13 consecutive days, making this its longest downtrend in over 37 years.

- contributed by Christopher Empett
Associated Foreign Exchange