The US dollar is up against all of its major counterparts today, over 1% higher against both sterling and the euro at $1.5730 and €1.3800 respectively.
In a surprise move, the People’s Bank of China raised it’s one year lending and deposit rate by 0.25%. The first rate increase in nearly three years. This caused the commodity linked currencies (which are predominantly also the higher yielding currencies) to fall sharply as investors looked to move their assets back into the potentially undervalued greenback.
The US currency’s rally is an extension of earlier gains, which came after US Treasury Secretary Tim Geithner said the US would not be engaging in dollar devaluation and needed to work hard to preserve confidence in a strong dollar.
The greenback has not only clawed back heavy losses suffered over the past few weeks against the commodity driven currencies, but it has also made substantial gains against other safe-haven currencies. Against the Swiss franc, USD is up almost 1.5%, and is also trading higher against the yen, moving away from 15 year lows.
In other news, all eyes are on the UK government’s spending review which will officially be released tomorrow. With news leaked that the new £2.2billion HMS Ark Royal has been scrapped from the defence budget, maybe QE2 will take its place?
Tom Hampton
Analyst – Caxton FX
