Aussie Shines, Dollar Underpinned by Fed Rate Expectations

On Wednesday, the dollar held steady in Asia trading, supported by expectations U.S. rates will increase by the year-end,  just below a near nine month increase struck suddenly, while the Australian dollar increase as inflation data doused probabilities of a rate reduction there.

Last quarter, Consumer prices recovered by more than forecast in Australia, while the yearly pace of core inflation increased for the first time in more than a year, leading investors to price out nearly any possibilities of a near term reduction in interest rates.

The Aussie increased  to $0.7709 <aud=d4>from $0.7645 before the data. It increased 0.5% on the day at $0.7684.

“We’ve seen Aussie buying against the crosses, so Aussie outperformance is the main theme in the Asian session, with it testing recent highs around that 77-figure area,” said Sue Trinh, head of Asia FX strategy at Royal Bank of Canada in Hong Kong. “The question, though, is whether it can sustain levels above there.”

The dollar index, which tracks the dollar against six major competitors, stood at 98.739 after increasing as high as 99.119 overnight, its highest level since Feb. 1.

The U.S. currency has been strengthened by increasing expectations the Fed is on track to increase rates by the end of the year. The market was pricing in  more than 78% possibilities that the Fed would increase rates in December, according to CME Group’s FedWatch program, and even a slightly weak consumer confidence reading did little to dip those potentials.

On Tuesday, U.S. data released by the Conference Board presented the consumer confidence index decline to 98.6 in October from a downwardly revised 103.5 in September.

Given the current strength of the U.S. currency on a dollar index basis, “it will be interesting to note whether the Fed makes any acknowledgment of the amount of financial tightening that has occurred through dollar strengthening,” said Bill Northey, chief investment officer of the private client group at U.S. Bank in Helena, Montana.

On Tuesday, the euro <eur=>was steady at $1.0890, after sliding to an almost eight month decline of $1.0848.

Compared to the yen, the greenback stood at 104.24, flat on the day but not far from a approximately three month high of 104.87 yen touched in overnight U.S. trading.

Temporarily,  Sterling, fell 0.2% to $1.2164 <gbp=>after Bank of England Governor Mark Carney cast uncertainty on expectations for more monetary stimulus in Europe, stating that the Bank of England would “undoubtedly” take sterling’s weakness into account at its rate-setting meeting next week.

Carney’s comments helped send the pound to a two week decline of $1.2082.

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