Published: August 8 2008 19:17 | Last updated: August 8 2008 19:17
The US dollar enjoyed its biggest one-day jump against the euro in eight years on Friday, as the long-running tendency of the dollar to weaken while commodity prices strengthened went into a dramatic reverse.
Against a trade-weighted basket of currencies, the dollar was at its strongest in four months. Meanwhile, there was a further sell-off of crude oil, which touched a low of of $115.61 a barrel – down more than $4 on the day. This was the lowest level since early May, and more than 20 per cent below its record high of $147.27 a barrel set last month. Non-energy commodities were also down more than 20 per cent from their peak.
The shift in sentiment was triggered by comments from Jean-Claude Trichet, president of the European Central Bank, who warned on Thursday that growth in the eurozone would be “particularly weak” in the third quarter.
This sparked speculation that the ECB would be forced to abandon its hawkish monetary policy stance and start cutting interest rates, a vital source of support for the euro.
“This is the watershed week for the US dollar,” said Marc Chandler, currency strategist at Brown Brothers Harriman. “The magnitude of the dollar’s moves and the breaking of key technical levels suggest that a major shift in the outlook toward the dollar is occurring as massive positions are adjusted.”
Other analysts described the widespread buying of dollars as “capitulation”.
The dollar rose to a five-month high of $1.5055 against the euro and climbed 1.3 per cent to $1.9189 against the pound, the currency’s strongest level since November 2006.
Traders said the violence of the move was testimony to the extent to which the market had been surprised by economic weakness outside the US and the softening of previously hawkish central bank rhetoric.
“Mr Trichet was unable to convince the public that the ECB had not been surprised by the eurozone’s economic downturn,” said Ulrich Leuchtmann at Commerzbank. “Therefore, the last remaining rate hike expectations were taken off the table.”
UK economic data has shown increasing weakness this week; officials in Japan warned that the economy was headed for a recession; and the Reserve Bank of Australia said it was planning to start cutting interest rates to head off an impending economic slowdown.
Copyright The Financial Times Limited 2008
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