Dollar lurches to 16-month low - European and US equities challenge year’s highs

Dollar lurches to 16-month low - European and US equities challenge year’s highs
By Jamie Chisholm
Copyright The Financial Times Limited 2009
Published: November 25 2009 07:09 | Last updated: November 25 2009 16:56
http://www.ft.com/cms/s/0/ab42c6e4-d989-11de-ad94-00144feabdc0.html


16:45 GMT. Gold leapt to another high on Wednesday as the dollar tumbled below significant support levels to hit near 16-month lows.

After trading within a tight range for nearly three weeks, the greenback suddenly lurched lower, breaching 74.50 on a trade-weighted basis and decisively cutting through the $1.5050 mark versus the euro.

It also fell heavily against the yen, at one point touching a 10-month trough of Y87.40, in moves that are likely to have been exacerbated by thin trading ahead of Thursday’s US Thanksgiving holiday.

“It would be no surprise to see a panic acceleration lifting the euro by a further two or more cents while Americans feast on Thanksgiving Day turkey,” said Andrew Wilkinson senior market analyst at Interactive Brokers.

The dollar’s weakness provided further fuel to the gold price, pushing bullion to a new peak of $1,185.6. It was later up 1.4 per cent at $1,184.80. If these levels are maintained then the precious metal will be on track in November to enjoy its best monthly gains in a decade, an increase of more than 13 per cent, according to Reuters data.

The Market Eye
Tick by tick, you can watch it. The degree of (negative) correlation between western equity markets in particular and movements in the dollar have become so tight, one wonders whether there are any humans left in the trading rooms. It’s a simple binary strategy for machines to execute, it appears. However, a couple of possible cracks are beginning to show in the risk/on, risk/off carry trade facade. First, it was noticeable on Wednesday that when the dollar dropped through the bottom of its recent trading range, there was no reaction from stocks. Note also the performance of oil over the past few sessions. Crude has endured a couple of intraday sell-offs that appeared unconnected to the greenback, taking it at one stage earlier this week to below $76 a barrel. Are fundamentals re-asserting themselves? Possibly not, but it provides a warning to investors. The “great correlation trade” will be wonderfully profitable because of its beautiful simplicity. And then, one day, it won’t.

On Wall Street, the S&P 500 looked set to again challenge its highs for the year, though it appeared to be economic data rather than the dollar’s decline that helped sentiment. Pick of the reports was the initial jobless claims, which showed the number of people signing on last week dropped below the important 500,000 level. The better news on the labour market and new home sales trumped a worse-than-expected reading on US durable goods orders.

At lunchtime in New York, the S&P 500 was up 0.5 per cent at 1,110.7. Its 2009 closing high, reached just over a week ago, is 1,110.3.

The Vix index, a measure of expected stock market volatility, fell to 20.05, its lowest level in 15 months. It was later trading down 1.2 per cent at 20.23, suggesting investors are sanguine ahead of the holiday break.

In Europe, the FTSE 100 closed up 0.8 per cent at 5,364.8, while the FTSE Eurofirst 300 gained 0.5 per cent to 1,021.9.

European bourses had started off on a sound footing, reflecting a positive session in Asian stock markets. China steadied after Tuesday’s 3.5 per cent swoon, with the Shanghai Composite climbing 2.1 per cent to 3,290.2 as the banking sector recovered slightly. The Hang Seng in Hong Kong was up 0.8 per cent at 22,611.8.

In Australia, the S&P/ASX 200 rose 0.8 per cent, with miners, unsurprisingly, leading the way.

Hats off to Tokyo, which was able to shrug off the worries about a strong yen and make its first gain in six trading sessions. The Nikkei 225 closed 0.4 per cent higher at 9,441.6. However, the yen’s acceleration to the upside in European trading, jumping 1 per cent to Y87.64 versus the dollar, suggested Tokyo could come under renewed pressure on Thursday.

The better US jobs data put pressure on government bonds following their strong performance on Tuesday in the wake of a well-received $42bn auction of five-year notes. The yield on the benchmark US 10-year Treasury rose 4 basis points to 3.34 per cent.

Oil benefited from the better tone in equities, rising 1.1 per cent to $76.88, after earlier dropping below $76 a barrel.