The Forex Daily Digest – October 8, 2009

The dollar traded near the lowest level in almost two weeks versus the euro as speculation that the Federal Reserve will follow other central banks in raising interest rates made the dollar less attractive. The AUD was the biggest gainer against the dollar this week, hitting a 14-month high, as the Reserve Bank unexpectedly increased the cash target to 3.25 percent and signaled further increases on the horizon. Gold futures climbed to a record high and crude oil gained as the dollar’s decline boosted commodities as an inflationary hedge.

The European Central Bank held its main refinancing rate at a record low of 1 percent at its meeting, and the Bank of England kept its rate at a record low of 0.5 percent. The fed funds target range is zero to 0.25 percent. Analysts expect the Fed to begin raising its benchmark rate in the third quarter of 2010, as will the ECB. Norway’s central bank is expected to raise its 1.25 percent target rate this year.

The USD rose, rebounding from a low of more than 8-months against the JPY as optimism stoked by Australia's interest-rate hike in the prior session dissipated, boosting safe-haven demand for the U.S. dollar. Market players were waiting for U.S. earnings results, especially at aluminum producer Alcoa, which traditionally starts each quarterly earnings season, for evidence of any strength in a U.S. corporate recovery. By the way, Alcoa missed street estimates with net income of eight cents a share; the consensus was for 33 cents. The company does expect better numbers in the fourth quarter and they see their business stabilizing. That may be enough good news to set the USD moving.

Japanese Finance Minister Hirohisa Fujii said he was quietly watching currency moves for now, but added authorities may take some steps if moves become abnormal. He added expectations for low U.S. interest rates were behind dollar weakness and recent moves stemmed from a falling dollar rather than yen or euro strength.

Saudi Arabia’s central bank chief denied holding talks on dropping the USD as the currency for pricing oil, and said his country’s foreign-exchange peg to the dollar is a matter of national economic interest. Speaking to reporters earlier, he said the U.K.’s Independent newspaper report was “absolutely incorrect” in saying Gulf oil producers and nations including China, Japan, France, Russia and Brazil had held secret talks on a nine-year plan to phase out the dollar in oil trade. He said that there has been “absolutely nothing” of that nature discussed between Saudi Arabia, the world’s biggest oil exporter, and other countries.

Treasury Secretary Tim Geithner was quoted as saying that Americans will have to start saving more in the future, transforming the global economy, and Europeans and Japanese must work to boost domestic demand. He told a German interviewer that "if the U.S. starts saving more, that changes the whole world's economic reality." Geithner said China was already doing a lot to consider how to put growth on a more sustainable path.

Gold’s rally to record highs show that commodity investors continue to be concerned that the U.S. economic recovery will encourage inflation even as Wall Street forecasts and government bonds advocate stable prices. Bullion has jumped 18 percent this year, heading for a ninth annual gain, and futures touched a record $1,049.70 an ounce amid rising demand for a hedge against inflation and a weaker USD.

On the U.S. economic calendar today is the weekly Initial Jobless Claims report for the week of October 3rd and the August Wholesale Inventories report. In earnings today International Speedway, Nu Horizons Electronics, PepsiCo, Ted Baker Plc, and Pacific Continental Corp are all on the calendar.

Happy Trading,

James Dicks