FOREX: weekly review

The dollar hit a 15-month low this week as the prospect that US interest rates would stay at ultra-low levels weighed on the currency.

This was put sharply into focus on Thursday after the European Central Bank delivered its first interest rate rise since the start of the financial crisis in an attempt to fight inflation.

The central bank lifted its main lending rate by 25 basis points to 1.25 per cent, while Jean-Claude Trichet, ECB president, signalled more tightening to come.

Over the week, the dollar index, which tracks the US unit’s progress against a basket of six leading currencies, fell 1 per cent to 75.070, its weakest level since December 2009.

The dollar also dropped to 15-month lows against the euro and the pound, falling 1.5 per cent to $1.4437 and 1.8 per cent to $1.6393 respectively on the week. It also fell 1.4 per cent to SFr0.9110 against the Swiss franc over the week.

Analysts said the prospect of an extended period of easy monetary policy in the US – combined with rising investor optimism – was encouraging investors to use the dollar to fund carry trades, in which the purchase of riskier, higher-yielding assets is financed by selling low-yielding currencies.

Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ said the yen was also the other clear carry trade funding currency given that Japan was likely to keep rates lower for longer than even the US as it battled deflation and the aftermath of last month’s earthquake.

Indeed, the yen dropped 1.3 per cent to a six-month low of Y85.10 against the dollar over the week and lost 2.8 per cent to an 11-month trough of Y122.86 against the euro.

Meanwhile, the Australian dollar which, given its relatively high yield is a favourite target for carry trade investors, rose 1.4 per cent to a fresh 29-year high of $1.0531 against the US dollar on the week and climbed 2.8 per cent to a 2½-year high of Y89.65 against the yen.

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