Rags to Riches

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Dollar falls to 2010 low vs major rivals

The U.S. dollar fell to a 2010 low against a basket of currencies on Thursday after Singapore let its currency strengthen, but analysts saw increasing chances of a dollar rebound with negative sentiment so high.

The Australian dollar, which boasts the highest yield among major currencies, soared to its strongest level since the currency was floated in 1983 to US$0.9994, as investors dumped the U.S. currency on expectations the Federal Reserve would again start printing money next month.

Singapore's central bank widened the currency trading band in which it maintains the Singapore dollar, propelling the currency to a record high. Singapore is suffering from rising inflation and the move was seen as a tightening of policy - the opposite of what the U.S. Federal Reserve is expected to do. The Chinese yuan hit its highest closing level against the U.S. dollar since July 2005.

"Singapore is often seen as a bellwether for the rest of the Asian currencies," said Firas Askari, head of FX trading at BMO Capital Markets in Toronto. "It opens the way for the region to have currency gains (against the U.S. dollar)."

The dollar index .DXY, which tumbled 1 percent to its weakest since December at 76.259, is on course for a test of trendline support at 75.95, with its November low of 74.17 then not far away. The 75.95 target is the trendline from two major lows in July 2008 and in November 2009.

The euro surged to a more than eight-month high of $1.4123 on trading platform EBS and faces near-term resistance at $1.4195, the January 25 high. Traders said the euro still has room to go, with strong resistance not seen until $1.45. The pair was last at $1.4073, up 0.8 percent.

After the euro failed to crack $1.40 the previous session, the currency's moves caught some players by surprise as they had been expecting more consolidation. It triggered stops around $1.4030 and then $1.4050 in Asia and subsequently cracked the $1.41 handle in Europe.

The Aussie last traded at US$0.9951, up 0.5 percent, with traders saying option barriers at $1.0000 were slowing the rally. It has gained about 11 percent this year and is up more than 20 percent from a low in May.

The options market suggests the recent upward momentum in the Aussie dollar has further to run.

DOLLAR BOUNCE?

Dollar selling accelerated after the release of Federal Reserve meeting minutes this week showed policy makers were considering more measures to stimulate the economy, including adopting a price-level target or buying more bonds.

Investors will closely watch a speech by Fed Chairman Ben Bernanke on Friday, which could provide hints on what the central bank might do at its November 2-3 meeting.

Lee Hardman, currency economist at The Bank of Tokyo-Mitsubishi UFJ in London, said that judged by many metrics, dollar pessimism is now at "historically extreme levels signaling an elevated risk of a sharp correction higher for the dollar when dollar selling has reached a crescendo."

"At the end of the day, when everybody is on the boat and everybody is doing the same way, it doesn't take much to make the boat go the other way," BMO Capital's Askari said.

The dollar could see a rebound if the Fed announces asset purchases of less than $1 trillion after its meeting in November, which would disappoint some market participants hoping for a bigger move and ease concerns about a debasement of the U.S. currency.

http://www.reuters.com/article/idUSTRE69D46V20101014