The US dollar continued to enjoy strong support among forex investors last week as it was up more than one and a half percent according to the Bloomberg Correlation-Weighted Currency Index (BCWI).
The US dollar continued to enjoy strong support among forex investors last week as it was up more than one and a half percent according to the Bloomberg Correlation-Weighted Currency Index (BCWI). With the US Federal Reserve relatively hawkish, and the Bank of Japan and European Central Bank easing policy further, the greenback is expected to continue enjoying investor favor.
The Bloomberg Dollar Spot Index powered 0.9 percent higher in October, its fourth consecutive monthly gain and its longest winning streak in more than a year and a half. USD/JPY rose to the strongest in almost seven years to 113.73, its highest since December 2007. The buck had soared nearly 3 percent versus the yen on Friday alone after the BOJ announced fresh stimulus measures and continued its advance on Monday.
The US currency looked extremely rampant as the Fed effectively ended its record bond buying program after its FOMC meeting last week, and ahead of reports this week that are expected to show manufacturing activity rose and employers added more workers. Policymakers surprised markets last week, by sounding more hawkish, and ended the quantitative easing program as expected, citing improved labor market conditions. Despite keeping rates near zero and repeating the pledge to keep them low for a “considerable time”, the Fed expressed confidence in the economic recovery and downplayed risks posed by weak inflation.
Last Friday, Bank of Japan policymakers announced that they will seek to raise its monetary base by 80 trillion yen annually from the previous 60 to 70 trillion. They also decided to triple the purchase of risk assets like exchange traded funds (ETFs) and real investment trusts (REITs).
The central bank introduced this latest bout of monetary stimulus which it called a pre-emptive move to boost inflation. The yen slipped across the board after the announcement, more than 4 percent on the week according to the BCWI. Apart from dropping to near a seven-year trough against the buck, the Nipponese currency dropped to a 17-month low against the Aussie and six-month trough versus the euro. EUR/JPY touched 142.27 by the time of writing and AUD/JPY to 99.17.
A referendum this month on gold will put the floor on the EUR/CHF pair under extreme scrutiny. Switzerland will hold a referendum on gold, that is being opposed by the Swiss National Bank (SNB), which if passed will prevent the central bank from selling its gold holdings, would require the SNB to bring back gold reserves held overseas and keep at least 20 percent of its assets in gold.
With the SNB absolutely adamant in its commitment to defend the floor on EUR/CHF it will be interesting to see who will give in first, whether the forex market which will try push the exchange rate below 1.20 or the SNB.