The Forex Daily Digest – September 10, 2009

The USD dropped to the weakest level in almost a year against the currencies of six major U.S. trading partners as record low interest rates encouraged investors to sell the dollar and embrace risk. The greenback became the cheapest funding currency in London this week, making it more attractive as a means of financing purchases of higher-yielding assets.

A key bank-to-bank lending rate fell to its lowest point on record yesterday, signaling continued easing of the once-frozen credit markets. Three-month Libor fell just below 0.30% for the first time since the British Bankers' Association started keeping records in 1986. That's a far cry from where rates sat just one year ago, when the 3-month rate peaked above 4.8% on Oct. 10th.

The AUD traded near a one-year high on speculation the global economic recovery will spur investors to buy higher-yielding assets in the South Pacific nation at the expense of the greenback. The NZD dropped for the first time in five days before the central bank meets in Wellington on Thursday. Policy makers will leave the official cash rate at 2.5 percent.

The CAD dropped against the USD as risk appetite diminished along with Toronto stocks, but much of the market was focused on the Bank of Canada's key rate announcement scheduled for Thursday. While no change is expected on the interest rate front, investors are closely watching whether the central bank will keep up pressure on markets to back off the CAD. It may also express confidence in its view that the economy is improving.

Gold dropped from more than $1,000 an ounce as some investors sold it after the price climbed to an 18-month high yesterday. Silver also fell a bit. Bullion futures reached $1,009.70 an ounce Tuesday, which is the most since March 2008, as the dollar dropped 0.9 percent against a basket of six major currencies. Yesterday, the dollar fell as much as 0.8 percent against the EUR, falling to a 2009 low, and gold futures touched $1,005 before erasing gains. Gold tends to rise when the U.S. currency weakens.

Japan’s former top foreign-exchange official, Eisuke Sakakibara, said the USD will stay the main reserve currency after a United Nations report this week said the dollar’s role in global trade should be reduced. He said the United States “will remain as the world leader for at least a few more decades.” The comment by Sakakibara, known as “Mr. Yen” from his 1997-1999 tenure at the Japanese Finance Ministry, comes after a UN report published this week that said a new currency should be created to reduce the dollar’s role and protect emerging markets from the “confidence game” of financial speculation.

The Chicago Fed President Charles Evans said the Federal Reserve will begin to raise interest rates once the jobless rate begins to drop and the recovery has gained traction. Evans said the U.S. economic contraction is "pretty much behind us" but that the recovery will be slow and that while the U.S. economy still faces a number of uncertainties, he does not think it will see a second downturn, or "double-dip" recession. Evans is a voting member of the central bank's Federal Open Market Committee (FOMC) this year.

In economic new today, watch for the International Trade report and the Initial Jobless Claims, both to be released at 8:30 am (ET). There will be a 30 year bond auction beginning at 1:00 pm (ET) and after the market closes the Fed will release its Balance Sheet and the Money Supply Report.

Happy trading,

James Dicks