Dollar Hit by Double Whammy

Today is shaping up to be “one of those days” for the US dollar. As Dean noted in his blog entry earlier this morning, the market can’t seem to distance itself from the dollar fast enough, causing it to lose ground to most of the majors. And that was even before the bad news.

It started with an announcement from the Royal Bank of Australia that the Central Bank was raising interest rates from 3.0 percent to 3.25 percent in a move that caught most watchers by surprise. The RBA made the rate change to address what it referred to as a “stronger than expected” recovery – so much so it seems, that the Bank has now switched from recovery mode, to inflation watch. While for many, the rate hike is seen as a bit premature – for the US dollar however, the rate increase is just this side of alarming.

Already dealing with an interest rate differential that has seen USD sold to fund the purchase of Australian dollars in a resurgence of the carry trade, this latest move will make the USD / AUD carry trade even more attractive, adding further downward pressure on the dollar. Unfortunately, things didn’t get much better later in the morning.

Although it has been denied by the named participants, several reports hit the newswires this morning stating that the Gulf state oil producers, together with China and Russia, have held talks aimed at replacing the dollar as the currency for pricing oil. The reports suggest that the oil producing nations – in an attempt to reduce the volatility and depreciation associated with the dollar of late – will adopt a basket of currencies including gold to set oil prices.

The veracity of these reports was immediately called into question, but just the suggestion of a pricing change had an immediate impact on the dollar. By 9:30 am in New York, this mornings double-whammy dragged the dollar down by almost half a percent to $1.4702 per euro, from $1.4648 yesterday.

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