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The tone in forex markets is moving perceptibly away from the dollar in the face of continuing weakness in U.S. equity markets. The fact that stock markets around the world are faring no better has not prevented analysts from focusing on the possible implications of major reversals in international investment flows. Any pronounced trend to repatriate funds from U.S. markets would undoubtedly boost the euro-zone and other regions that have suffered as the dollar has pulled capital for the past couple of years.

So far, indication of significant gains for other currencies is limited. The euro is trading at $0.8720, above last night's close at $0.8710. "The key for the currency markets is the slide in the stock markets," said Neil Mackinnon of

Merrill Lynch

. "We're on the brink of a real meltdown and that will take the dollar with it," he added.

Economic data from Germany gave some support to the idea that things are improving in the euro-zone. Output grew 1.1% in August, above expectations of an increase of 0.2%. On the other hand, the German August trade surplus slipped to DM4 billion from DM10.3 billion in July.

Despite ongoing concerns about the robustness of Japan's underlying economy, the yen should benefit if doubts about the strength of the dollar increase. Overnight, dollar/yen remained steady around closing levels and is opening at 107.90. Like the dollar, the yen's progress is not being helped by weak stock market performance. The


index fell again and is now at an 18-month low. "The Nikkei is deflating, and it's difficult for an already fragile financial and banking system to increase its risk appetite," said Mackinnon.


Ministry of Finance

has given a modestly bullish view of the economic recovery. "Movement toward a self-sustaining recovery, led by the corporate sector, is continuing," said a report from regional bureau chiefs.

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The euro/yen cross strengthened overnight, opening around 94.10.

As a traditional safe haven, the most obvious beneficiary of a weaker dollar would be the Swiss franc. This morning the Swiss franc made moderate gains to open at SF1.7335.

Sterling also moved higher from yesterday's close at $1.4525, to trade at $1.4590 in New York. "Sterling is an interesting one. There is an important trend line at $1.4750, and if we get through that, there could be a rapid move to $1.50," observed Mackinnon.

The Canadian dollar continues to trade without much direction and is opening lower at C$1.5025. With the domestic economy performing well, Canada should have room to improve if the U.S. dollar loses its dominance.

The Australian dollar is opening 35 basis points firmer at $0.5365. The currency has finally shown some vitality after being mired near record lows for the past week. Australian Treasurer

Peter Costello

said today that the economy was strong and the current account deficit was improving.

He also blamed the attraction of the U.S. economy for the weak Aussie dollar. "I think what's happening on international exchange rates is not much to do with Australia," he said, it's about "a love affair with all things American."

The New Zealand dollar has also ticked up by 25 points, to open around $0.4060.

The South African rand is not showing much benefit from the euro's better tone and has just hit a new all-time low at 7.39/dollar.

In Poland the zloty has dropped sharply to trade at a three-week low of 4.60/dollar. Question marks over privatization inflows have added to the currency's woes.

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