â€¢ Japanese Yen: Blows through 114.00 level as Chinese official hints at diversification
â€¢ Australian Dollar: RBA hikes to 6.75%
â€¢ Euro: Hits 1.4700 on Chinese comments
â€¢ US Dollar: Productivity and Inventories on tap
The dollar collapsed completely tonight in Asian and early European trade after Cheng Siwei, vice chairman of the National People's Congress stated that China should invest its nearly $1.5 Trillion of FX reserves in stronger currencies. The FX market instantly interpreted the remarks as a sign that the Chinese will begin diversifying their currency assets away from the greenback and as a result the dollar reached record lows against the euro, hitting 1.4705 in morning London trade. It fell materially against the pound as well taking out the 2.10 level.
Although, Mr. Siwei has a history of making broad economic comments that often do not reflect actual policy, and although the National Peopleâ€™s Congress is not involved in directly setting currency targets, today reaction speaks volumes about the extent of anti-dollar sentiment present in the FX market right now. The price action in the dollar is uniformly bearish, as currency traders fear that the problems in housing and finance sectors will drag the US economy into a recession in 2008, while the rest of the world will continue to expand and perhaps even tighten its monetary regimes.
Today the markets saw more evidence of that decoupling thesis as Reserve Bank of Australia raised its overnight rate to 6.75% despite the fact that the country is facing a Federal election at the end of the month. Governor Stevens noted that inflation has exceeded the central bankâ€™s target and decided to act expeditiously. suggesting that further hikes may be in the offing. It is precisely this type of stark difference between the easing monetary policy of the Fed and the continued hawkish posture of USâ€™ s major trading partners that has helped to produce the current round of dollar weakness.
Tomorrow all eyes will focus on the ECB press conference with President Trichet facing a very tough decision. Given their recent rhetoric European monetary authorities clearly want to raise rates by 25bp before year end, as inflation in EZ exceeds the ECB self imposed target of 2%. However, with EURUSD already trading at 1.4700 Mr. Trichet risks the possibility of pushing the pair to 1.5000 should he hint at a December hike. That in turn is likely to elicit howls of protest from EZ finance ministers who fear that the current currency regime will undermine the regionâ€™s economic recovery. If Mr. Trichet balks and holds rates steady, the EURUSD may finally embark on long overdue correction.