Traders Take Advantage of Recent Dollar Rally

The US dollar fell on Wednesday as investors took advantage of the dollar’s biggest rally in three weeks. Investors and traders remain concerned about massive US deficits and the indication that the Federal Reserve may keep interest rates at record lows into 2012. Most traders say the dollar’s decline will continue because of rate concerns. On Tuesday St. Louis Fed President James Bullard said that the Fed will cut back asset purchasing programs instead of raising interest rates. Jacob Oubina of Forex.com said, “That throws cold water on any lingering thoughts of rate hikes.”

Bernanke’s Remarks

Bernanke took investors by surprise when he stated that the Fed was “attentive to implications of changes in the value of the dollar,” but also said that rates would remain low for an “extended period.” Some traders believe the statement indicates that the Fed is concerned that further depreciation could cause inflation. Camilla Sutton of Scotia Capital stated, “Though not sounding an overtly alarmed tone over the value of the dollar, commenting on the currency shows that the Fed is concerned enough….to at least address the issue” Currency analysts believe that weak inflation and industrial output data are not enough to prompt the Fed to raise rates.

Calls For Flexible Chinese Currency Policy

On Tuesday European Central Bank President Jean-Claude Trichet said that a strong dollar is in the US’s interest and that the euro was never meant to be used as a reserve currency. Societe Generale strategist Peter Frank said that Bernanke’s remarks were probably intended to ‘smooth’ the dollar’s decline instead of reversing it.  The euro vs. dollar rate fell 0.7% and the euro traded at $1.4872 on Tuesday. Many analysts say that for the dollar to reverse its decline China needs a more flexible currency policy or the Fed needs to raise rates. Johan Javeus of SEB in Stockholm said, “Neither of those prerequisites have been fulfilled, so the controlled, grinding lower of the dollar will continue.”

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