The dollar was sharply lower versus the Euro and Swiss last week, touching a new record low versus Europe’s single currency as selling pressure resumed following two days of modest gains.
The dollar had bounced modestly last week, after officials from the European Central Bank (ECB) had chimed in with criticism of the Euro’s recent gains versus the dollar. ECB Chief Economist Otmar Issing spoke, but did offer up the same concern over currencies.
Additionally, the dollar was pressured by a Wall Street Journal article highlighting the Bush Administration’s tolerance for a weaker dollar.
Those factors all helped to keep the dollar weaker, particularly versus the Euro, despite the fact that the Commerce Department reported that the US trade gap narrowed slightly more than expected in September, to $51.56 billion in September from a downwardly revised shortfall of $53.55 billion in August.
Though the dollar initially strengthened following the trade report, it quickly turned around once traders began to see that the data clearly do not reflect the huge rise in oil prices that was seen in October.
That caused the Euro to briefly push through the key $1.30 level, topping out at $1.3005 before turning lower once again.
Traders said part of the up and down reaction to the trade data was related to frenzied options trading, with the market trying to take out so-called barrier options that had been placed around the $1.30 mark against the Euro. The holder of the option loses the asset if the barrier number is touched.
“It seems that after the number came out, the market sensed the opportunity for some options action….It took out the barriers and then came right back,” said Grant Wilson, senior foreign exchange trader at Mellon Bank in Pittsburgh.
Once activity settled down, the dollar was down on the day versus the Euro, but well off its low point.
The yen has weakened steadily versus the, largely due to the Euro strengthening through key resistance against the yen at around the Y137.84 level. Cross currency trading therefore combined a stronger dollar with a weaker yen to push the Japanese currency lower against the dollar, said Tim O’Sullivan, chief trader at Gain Capital in Warren, NJ.
Sterling also fell versus the dollar, after a report from the Bank of England (BOE)suggested that the UK inflation is likely to remain subdued, sounding a negative cord for the UK economy and cutting into the chances for further interest rate hikes.
Though the BOE said it expects inflation to rise above its target in the fourth quarter of 2006, with consumer price inflation hitting 2% in the third quarter of 2006, economists saw the report as relatively dovish for interest rates. In a research note, Lehman Brothers economists said the report makes a final hike in BOE’s interest rate cycle slightly less likely but doesn’t completely rule it out if data were to surprise. (Dow Jones & Company, Inc.)