Daily Forex Commentary: Would US Dollar Remain The Global Reserve Currency?

Euro

The euro depreciated vis-à-vis the U.S. dollar Wednesday as the single currency tested bids around the US$ 1.3430 level and was capped around the US$ 1.3675 level.  President Obama spoke last night and defended his budget proposal.  Obama also noted the U.S. dollar is “extraordinarily strong right now” and said he doesn’t see a need for a global reserve currency, an idea being promoted by China and Russia.  In contrast, U.S. Treasury Secretary Geithner today said he is open to the proposal but later clarified his remarks after the dollar fell sharply, noting the U.S. dollar would remain the main global reserve currency.  Some traders expect the proposal will gain some traction at the Group of Twenty meeting on 2 April.

Data released in the U.S. today saw Febuary headline durable goods orders climb an unexpected 3.4%, defying expectations of a modest decline, while February new home sales were up 4.7% to an annualized 337,000 last month - the first improvement in seven months.  On an annualized basis, however, new home sales were off 41.1% and durables were off 28.4% y/y.  Notably, orders for non-defense capital goods excluding aircraft were up 6.6% after falling 11.3% in January abd February building permits were upwardly revised to +6.2% from +3.0%.  Recent economic data in the U.S. have been encouraging but it is premature to say an economic recovery is afoot.  In eurozone news, French February unemployment was up 3.5% to 2.385 million and up 19% y/y.  Also, the German March Ifo index of business sentiment fell to a record low of 82.1, indicating a worsening recession in the eurozone’s largest economy.  Eurogroup chairman Juncker talked about reported U.S. pressure on the eurozone to increase fiscal stimulus spending saying “It is out of the question that we increase our economic stimulus plans.  I see a timid recovery towards the end of 2010.”  Euro bids are cited around the US$ 1.3245 level.

Japanese Yen

The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥96.90 level and was capped around the ¥98.35 level.  Bank of Japan Deputy Governor Yamaguchi reported the BoJ’s focus “will be placed, for the time being, on securing market stability and facilitating corporate financing.  The bank will continue to examine carefully developments in financial markets and corporate financing and to take necessary measures in a decisive manner without any predetermined view.”  Yamaguchi was pessimistic on Japan’s export outlook and said recently announced quantitative easing measures such as purchasing more bonds outright and providing subordinated loans to banks through the fiscal year-end next week may not be sufficient.  Furthermore, he said consumer prices may soon begin declining on a year-over-year basis.  BoJ Governor Shirakawa today testified “The country’s economy is facing downside risks and prices will likely soon start falling. But right now the country is not going through a vicious cycle where economic contraction and price falls reinforce each other.” The Nikkei 225 stock index lost 0.23% to close at ¥8,479.99.  U.S. dollar offers are cited around the ¥104.15 level. 

The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥132.85 level and was supported around the ¥130.75 level.  The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥140.95 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥87.20 level.  The Chinese yuan depreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 6.8304 in the over-the-counter market, up from CNY 6.8294.

British Pound

The British pound depreciated vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.4515 level and was capped around the $1.4735 level.  Bank of England purchased corporate bonds worth ₤85.525 million in the secondary market today, part of its quantitative easing plan to ease credit strains.  U.K. Business Secretary Mandelson today reported the “era of the G8 is over.”  London will host the Group of Twenty meeting on 2 April.  Chancellor of the Exchequer Darling is expected to downgrade his growth forecasts and increase his borrowing estimates when he presents his budget on 22 April.  Prime Minister Brown today reported “The U.K. government will do whatever is necessary to revive growth, with global deflation the main danger in the short term.”  Cable bids are cited around the US$ 1.4410 level.

The euro moved higher vis-à-vis the British pound as the single currency tested offers around the ₤0.9375 level and was supported around the ₤0.9160 level.

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