On Tuesday, some fundamentals pushed markets further in the direction of that ‘Great Unwind’, says Authers. “UK inflation came in way below forecast, within the Bank of England’s targets. So higher interest rates were not the inevitability many assumed, and the pound dropped below $2 for the first time since June. The dollar has now gained 3.1 per cent against sterling in three weeks.”
Right now, the retreat from risk “is more important than fundamentals,” notes Authers. “US investors have invested heavily outside the US. Faced with subprime losses, they have taken profits. The net effect is to buy dollars.”
“Then there is speculation,” he adds. “Marc Chandler, strategist at Brown Brothers Harriman, says the dollar, like the yen and the Swiss franc, has become a ‘funding currency’: traders sell the dollar short, and use the profits generated as it falls to invest elsewhere. As they lose on those other investments, they remove their “short” positions — or, in English, buy dollars.
This phenomenon is clearest in the 13.9 per cent rebound of the low-rate yen against the high-rate New Zealand dollar.
Fears about liquidity also matter. Speculators buy Canadian commercial paper — short-term borrowings backed by assets — to bet on Canada’s dollar rising. Now commercial paper issuers say no one will lend to them. This has helped push the US dollar up 3.1 per cent against its northern cousin.
It is a space to keep watching…