By: Hillel Fuld
The EUR reached a 14-month high vs the USD in Asia Wednesday as a result of the broad greenback weakness. This weakness was a result of growing expectations that the Federal Reserve is going to keep interest rates low for at least the upcoming year.
The JPY also increased against the USD unit and both of these currencies may very well rise even further later in the day because of a few of dollar-strengthening factors, dealers said. U.S. Federal Reserve Vice Chairman Donald Kohn said overnight in a speech in St. Louis that he expects "the persistence of economic slack, accompanied by stable longer-term inflation expectations, will keep inflation subdued for some time."
His dovish comments sent the yield on the benchmark 10-year Treasury down to 3.32%. The low interest, combined with the latest sign that they are likely to stay that way well into next year, gave Asian players incentive to get rid of their dollars.
This development obviously caused the USD to weaken broadly against its rivals, particularly against currencies offering higher yields such as the EUR and AUD, dealers said. Furthermore, gold, which generally shifts inversely to the dollar, hit a new record high in Asian hours at $1,069.77 an ounce. "Investors have been reacting to Kohn's comments by buying the Australian dollar, gold and other higher-yielding assets against the greenback," said Yuji Saito, head of the foreign exchange group at Societe Generale. At 0450 GMT, the EUR stood at $1.4885 compared to $1.4829 late Tuesday in NY.
The Dollar Index, which measures the currency's value against six of the majors including the EUR, was at 75.59, down from 75.95 in New York, after marking a fresh 14-month low at 75.55. The AUD rose to $0.9146, its record high since August 6, 2008. VS. the JPY, the dollar traded hands at Y88.98 compared to Y89.75.
The U.S. currency could fall to Y88.50 later in the day, Societe Generale's Saito said. The renewed USD weakness comes as dealers and analysts claim that central banks around the globe are lowering the size of their reserves held in the low-yielding USD. "The significant weight the 'low rates for a long time' rhetoric is placing on the dollar is being compounded by reserve managers' diversification away from the dollar," said Barclays Capital Research's foreign exchange analyst David Forrester. "Low rates in the US relative to elsewhere are creating a strong incentive for reserve diversification."
Dealers said that unless the U.S. economic data and corporate earnings reports present surprisingly positive results and cause U.S. share markets to rally, pushing up the long-term interest rates, the USD will most likely continue to weaken for the rest of the week. U.S. September retail and food sales are due later at 1230 GMT.
Economists surveyed by Dow Jones Newswires on average expect sales to fall 2.1%, after climbing 2.7% in August. Traders will also watch the third quarter earnings report from J.P. Morgan Chase. "If the data and earnings reports are basically in line with expectations, the dollar weakness may persist," said Societe Generale's Saito. In that case, the euro could climb to a fresh fourteen-month high at $1.4920, he added.