The US dollar plummeted to record-lows against a broad swath of currencies, as commentary from a Chinese politician sparked a panicked dollar sell-off through overnight currency trading. Cheng Siwei, a senior Chinese congressman, said that his country should look to diversify its 1.4 trillion dollar currency reserves into stronger currencies and specifically made reference to the euro. The politician was quick to backtrack on his initial statement in a later question and answer session, but the damage was already done; the euro immediately set fresh record-highs of $1.4665 through the typically uneventful Tokyo trading session.
Euro bulls continue to trounce the dollar through the later New York price action, sending the single currency to $1.4729 ahead of the stock market open. The British Pound likewise saw incredible rallies on the overnight, setting fresh 26-year highs of $2.1069 against the downtrodden greenback. A sharp rise in risk aversion only exacerbated the dollar’s downfall against the Japanese yen, with the greenback losing a substantial 1.60 to lows of 112.76 yen. The US currency rout unsurprisingly led to a fresh all-time high in the Canadian dollar, which traded as high as C$0.9056 per USD before a later pullback.
Surprising commentary from Chinese Politician Cheng Siwei was the clear highlight of the day’s currency trading, as panicked speculators immediately sent the greenback to incredible depths against major forex counterparts. The congressman said that Chinese officials should look to diversify its $1.4 trillion currency reserves into stronger currencies, and explicit mention of the euro sent the single currency flying to fresh record highs. It remains relatively clear, however, that Siwei is not a financial authority nor does he have any notable influence on the domestic central bank. Yet traders completely ignored such facts and did what they have done best—sell the dollar against the euro and other high-flying currencies.
Even the most ardent of US dollar bulls seemed willing to throw in the towel after the greenback’s sizeable descent. According to real-time FXCM dealing data, retail speculators refused to buy into dollar dips for the first time in recent memory. A sharp pullback in overall open interest made it explicitly clear that US dollar longs are becoming increasingly scarce. Given such overwhelmingly bearish dollar sentiment, few are willing to stand in the way of further Euro gains. Yet it is exactly these sentiment extremes that have historically brought substantive turns in asset prices. Though it is clear that the dollar will be hard-pressed to show a substantive bounce in the days ahead, one-sided markets increase the risks of a noteworthy reversal in short to medium-term trading.
US equity markets continued their recent declines on a sharp rise in global risk aversion, with the Dow Jones Industrial Average a sizeable 200 points lower to 13,465. Pronounced dollar losses are not necessarily to blame for the stock market drop, but the same investor skittishness that pervades through currency markets likely forced similar moves in equities. The diversified S&P 500 index was the biggest percentage loser on the afternoon, falling below the key 1,500 mark on a whopping 1.7 percent decline. The speculative NASDAQ Composite likewise saw a sizeable tumble, losing 1.5 percent at 2,782.
US Treasury yields were unsurprisingly lower in the wake of overall volatility, with the 2-year Note down a substantial 11 basis points in yield to 3.60 percent. Such double-digit movements in bond yields are becoming increasingly commonplace through recent market volatility. Increased market skittishness likewise spread to interest rate expectations, with a small shift in Fed Funds futures showing increased likelihood of a Fed interest rate cut in its December meeting.
[I]Written by David Rodríguez, Currency Analyst for DailyFX.com[/I]