The major European currencies were rallying Wednesday on the renewed belief that future actions by central banks will make the greenback less attractive to investors relative to euros and pounds.
One pound Sterling was buying $2.0158, up from $2.003 late Tuesday. The euro was trading for $1.3644, up from $1.3609 a day earlier.
"The conviction is growing in the market that the Federal Reserve is going to cut interest rates, while it's looking like the European Central Bank and the Bank of England will at worst stay on hold," says Naomi Fink, a senior currency strategist at BNP Paribas in New York.
Such a scenario would mean the returns from holding dollars would fall when compared with the interest received from investing in euros or British pounds.There is also a distinct possibility that the Bank of England may in fact raise its short-term borrowing rates, thus amplifying the effect, adds Fink. Elsewhere, dollars were selling for 114.96 yen, up from 114.39 yen previously, as more carry trades unwound. The carry trade involves selling short a low-yielding currency such as the yen and profiting by purchasing higher-yielding money. Recently, nervous investors have been undoing those trades, thus bidding up the yen. The PowerShares DB G10 Currency Harvest (DBV), which seeks to benefit from the carry trade, was edging ahead 0.1% recently. The CurrencyShares British Pound Sterling Trust (FXB), which tracks the value of the pound, was ahead 0.7%, while the CurrencyShares Euro Trust (FXE), which tracks the euro, was up 0.3%. The CurrencyShares Japanese Yen Trust (FXY), a tracker for the Japanese currency, was losing 0.5%. In other currencies, the Australian dollar was steady at $0.816.