Dollar slumps to 16-month low

The dollar dropped to a 16-month low on a trade-weighted basis on Thursday, with Asian currencies leading the charge higher after Singapore let its currency trade to a record high.

Analysts said the dollar was suffering from the perception that despite an improving economy, the Federal Reserve was likely to stick to its ultra loose monetary policy stance as other central banks raised rates.

Michael Derks, analyst at online brokers FxPro, said this had encouraged investors to use the dollar as a funding currency in carry trades, in which low-yielding currencies are sold to finance the purchase of riskier, higher-yielding assets.

“For carry traders, the prospect of continued low interest rates has been manna from heaven, especially now that both of the major US political parties appear to be signing up to radical medium-term fiscal surgery, which will almost certainly make it harder to alter monetary policy,” he said.

The Monetary Authority of Singapore, which uses its currency as a monetary policy tool, said it would allow the Singapore dollar to strengthen in a bid to ease inflationary pressures sparked by robust economic growth and rising energy and food costs.

The Singapore dollar hit a record high of S$1.2461 against the dollar, before giving back some of its gains to stand up 0.5 per cent at S$1.2505.

The move from the MAS followed a series of policy actions in recent weeks by emerging market central banks, such as those of South Korea and Brazil, which have suggested that they might be willing to tolerate some appreciation of their currencies against the beleaguered dollar in order to fight inflation.

Valentin Marinov, currency strategist at Citigroup, said it was tempting to assume that “currency wars” rhetoric and policies, which were prevalent last autumn as emerging market central banks complained that the US authorities were engineering the dollar lower, might be taking a back seat for now as growing inflation pressures made currency appreciation more attractive.

“Yet, on the face of it, the appreciation in emerging market exchange rates still seems very contained so that policies of gradual FX appreciation still seems more or less in place,” he said. “This set-up could be particularly damaging for the dollar against other major currencies.”

Mr Marinov said this was because gradual emerging market currency appreciation was likely to encourage investors to sell the dollar against emerging market currencies, which would lead emerging market central banks to build up dollar reserves as they intervened to smooth currency movements.

This in turn, he said, would put pressure on the dollar against other major, liquid currencies, such as the euro and the Australian and Canadian dollars, as emerging market central banks diversified a proportion of their incoming reserves away from the US currency.

The dollar index, which tracks the US unit’s progress against a basket of six major currencies, fell to a low of 74.617, its weakest level since November 2009.

The dollar also dropped 0.8 per cent to Y83.24 against the yen, fell 0.3 per cent to $1.6309 against the pound and lost 0.2 per cent to SFr0.8944, a record low against the Swiss franc.

The dollar did receive some respite against the euro, however, rising 0.2 per cent to $1.4408, but still remained in sight of the 15-month low of $1.4520 it hit against the single currency on Wednesday.