USD A Favored Currency VS Higher Yielding Currencies

By: Hillel Fuld
The dollar remained stable and steady on Tuesday after sharp inclines on Monday, but made very small forward progress as investors ceased from selling the Euro and other higher-yielding currencies.

On Monday, the euro dropped the most since early August, with a close to 1 percent dip. The dollar index, on the other hand showed its best 24 hour gain since last month as investors unwound short USD positions following a sharp decline in commodities and stocks.

Traders and market experts stated that a rise in U.S. Treasury yields was also providing support to the greenback. The 10-year note yield US10YT=RR increased to its highest level in two months the previous day as the market suffered due to a record debt sale this week as well as the question when the Federal Reserve might start reversing its easy policy.

Asian stocks were showing losses after falls of 1 percent on Wall Street and with commodity-linked currencies such as the AUD, which has soared to its highest since August 2008 this month, were on the decline.

"A corrective move in equity markets and upward pressure on U.S. yields are bad for commodity currencies and good for the dollar," said Masafumi Yamamoto, chief FX strategist Japan at Barclays Capital in Tokyo.

The euro was also stable from late U.S. levels at $1.4864 but significantly lower than a 14-month Monday peak of $1.5064. This occurred after an editorial piece from China suggested the Asian giant should lift the share of the EUR and JPY in its foreign exchange reserves. Traders expected chart support for the EUR at $1.4850 and $1.4830, with a break of the second paving the way to $1.4675.

The USD has been a favored currency to sell against higher-yielding currencies in 2009, with the threat of prolonged low U.S. rates undermining it. End of week data from last week implied that currency speculators increased their trades against the USD up until Oct. 20 with the value of net short positions rising to $18.65 billion from $17.99 billion of the prior week. This trend caused more hesitation among investors when selling the USD, which created the ideal conditions for a pullback. "The correction in the euro and the Aussie were long due given the stretched long positions," said Anthony Gray, head of the risk solutions department at Travelex in Sydney.

The dollar index .DXY, a representation of the greenback's performance against six of the other majors, was steady on Tuesday at 76.038, above a 14-month low of 74.94 seen last week. The dollar hit its monthly peak against the JPY, touching 92.33 before falling back to 92.10. We saw an eight month low early on in October of 88.01, not too far from last January's 13-year low of 87.10.

"For dollar/yen it's tricky, but rising U.S. yields and a general buyback for the dollar is supportive for dollar/yen and justifies further liquidation of yen long positions," Yamamoto said. A Japanese trader at a local bank stated that there was talk of USD selling ready at 92.30-50, capping it for now.

The AUD headed upward from a $0.9125 low on good support from buyers around that level and was holding at $0.9180, below last week's 14-month high of $0.9330. It is most probable that it will be supported by speculation on whether rates will move up by 25 or 50 basis points next month, after Australia's central raised rates earlier in October. Investors are likely to stay wary ahead of U.S. consumer confidence numbers for October and house price index data for August, both expected in the late hours of the day.

In addition, the market is awaiting the third-quarter U.S. gross domestic product data on Thursday. Analysts expect the U.S. economy to expand 3.3 percent in the third quarter. Anything lower, like shock GDP numbers from the UK late last week, could trigger another wave of selling in riskier assets.