USD Advances Across the Board, Arab Monetary Fund Questions Dollar's Reserve Status

The dollar had a very lackluster session in Asia, gaining some ground during the day, though gains were mostly linked to the fact that the dollar was at the lower end of its recent range against a broad number of currencies, including the EUR and the market just pushed the buck back to the middle of the range. EUR/USD eased from 1.4076 to 1.4006 while Cable eased from 1.6522 to 1.6454. USD/JPY rallied from 95.17 to take out stops above 95.50 and trade to 95.59. China PBOC’s Zhou said that China’s reserves were stable, presumably indicating no action on dollar assets but the Arab Monetary Fund did question the dollar peg after the recent moves by China and Russia to look for a dollar reserve alternative. Asian stock markets were flat, vacillating between gains and losses on the day. U.S. treasury yields edged slightly higher but the move was seen a corrective bounce after the fall in yields last week. NYMEX oil and gold lost ground and though copper was up in early trading, China said it would pullback from recent purchases and stockpiling of metals under current conditions.

The USD has and looks likely to persist trading within broader ranges seen recently, with the currency’s former downtrend having waned. The Arab Monetary Fund questioned the USD peg after the recent moves by China and Russia, though to little impact as the end-of-dollar-hegemony idea is now a well worn debate and, ultimately, may not such a big negative in terms of valuation for the currency (as it would lesson the supply of dollars, increase the level of U.S. domestic yields and put downward pressure on the U.S. current account deficit). The USD is likely to remain inversely correlated with risk appetite, and come under pressure during periods of general global stock market gains, fitting Morgan Stanley’s USD smile hypothesis, which says that the U.S. currency tends to weaken during soft U.S. economic recoveries and strengthen during times of global risk aversion or strong U.S. economic growth. On the calendars Monday are Euro-Zone economic sentiment indicators, U.K. consumer credit and, in the U.S., the $62 bln 3- and 6-bill auctions and Fed speak from Rosengren.

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