US Dollar Movement
The primary market mover on June 11 was RBNZ’s intervention in the currency market to drive the Kiwi lower. The central bank’s decision to sell the currency did move the New Zealand dollar lower against most major currencies. Following up on that story, the Kiwi has shown signs of a rebound from yesterday’s lows. The country still boasts the highest interest rates among highly-traded currencies in the forex market. As such, the Kiwi is attractive to institutional investors, including multinational banks and pensions funds. But most currency market analysts believe that if the currency appreciates again, the RBNZ is likely to intervene in the foreign exchange market again.
Moving on to the big story on June 12, the US dollar has been particularly active in the forex market recently. The recent strength of the US dollar has been grounded in high US bond yields, especially compared to similar-term maturity yields in other major countries. This not only demonstrates US economic resiliency, but it has significantly increased the demand for the US dollar and dollar-denominated assets. The market response to this situation has led the dollar to achieve five straight days of gains against the Euro. One significant ramification of the recent dollar appreciation has been to cool the ardor for a rate cut by the Fed. The overall economic rebound combined with the rise in the forex market has seen the futures market to move to a neutral on the Fed’s position. But the dollar against expansion against the Euro might be halted soon. Comments by the European central bank recently have suggested that members might push for a rate hike. Current rates are low enough to leave room for growth, setting the stage for a hike at the next meeting of the ECB. This speculation would allow the Euro to rebound from its lows.
One currency that has resisted the strength of the dollar to a certain point has been the British pound. Economic data coming from the UK has been decent, meeting or surpassing most expectations. The country just reported inflation in May to be 2.5%, its lowest total in seven months. And that was still above the inflation target of 2%, set by the Bank of England. Following that development, BOE governor Mervyn King has called for higher interest rates in the next meeting. This would push the rate spread between the US and the UK to 50 points, further promoting the strength of the UK pound against the US dollar.
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