The dollar returned to its losing ways on Tuesday, sinking to new lows for the year versus the euro and a handful of other currencies as optimism over global recovery resurfaced again just as the Federal Reserve convened a two-day policy meeting.
Most of the dollar's losses occurred in overnight Asian and European dealings, as North American trading featured more narrow and restrained activity, with currency players settling in to await the Fed's policy statement due Wednesday afternoon.
A leading catalyst for the latest outburst of selling pressure against the dollar was upwardly revised growth projections for key Asian economies from the Asian Development Bank.
Region-wide, the ADB raised its previous 2009 projection for Asian economic growth ex-Japan from 3.4% to 3.9%.
The ADB's depiction of developing Asian countries like China and India as leading the global economy's emergence out of recession sparked a rally in commodity prices, equity markets and most risk-sensitive assets.
"The dollar-selling has really been across-the-board, starting in Asia with the ADB report, and then filtering into North American trade," said Jack Spitz, managing director of foreign exchange at National Bank in Toronto.
As part of the enhanced tolerance for risk, the euro hit $1.4822 - a fresh 12-month high - and the dollar fell to a new 12-month low of CHF1.0216 against the Swiss franc as traders abandoned the positions they'd staked out Monday in anticipation of this week's Fed meeting and also the assembly of leaders from the G-20 group of nations on Thursday.
Commodity-linked currencies like the New Zealand and Canadian dollars also saw particular benefit from expectations of revived Asian growth.
New Zealand's currency rose to its strongest level in over a year, assisted also by news of the nation's lowest annual current account deficit in more than four years.
Late Tuesday, the euro was at $1.4799 from $1.4676 late Monday, according to EBS via CQG. The dollar was at Y91.18 from Y92.05. The euro was at Y134.95 from Y135.09. The U.K. pound was at $1.6365 from $1.6206, while the dollar was at CHF1.0234 from CHF1.0327.
After Tuesday's big losses for the dollar, activity may stay more subdued until the Fed releases its policy communique Wednesday at about 2:15 p.m. EDT.
Even a small change in the Fed's statement Wednesday could prompt a big reaction in the foreign exchange market, given the uncertain mood and rampant speculation about what the Fed might say.
Few expect a substantial change in the Fed's position and commitment to keeping interest rates at ultra-low levels. But a slight change in nuance in the statement that accompanies the Fed decision could have a major impact on a market thirsting for any hint of how the U.S. central bank will exit from its stimulative policy stance.
Investors are anxious for the next chapter in the global recovery to unfold. Markets are itching to move beyond the push and pull of risk appetite/risk aversion and to begin focusing on interest rates and other fundamentals.
"While rates are almost guaranteed to remain at current levels, any sort of shift in policy stance or, more importantly, tone ... could send [forex] volatility through the roof," said Jamie Heighway, a market analyst at currency services firm Custom House in Victoria, British Columbia.
source: online.wsj.com
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