April 29, 2011 / 4:08 AM / in 6 years

Ailing dollar boosts demand for commodities, credit

HONG KONG (Reuters) - The dollar floundered at three-year lows against a basket of currencies on Friday, keeping precious metals near record highs, although the risk of dealers covering bets against the beleaguered U.S. currency in thin trading looms, especially given holidays in some centres including Japan.

An employee of the Korea Exchange Bank counts one-hundred-dollar notes at the bank's headquarters in Seoul October 8, 2009. REUTERS/Choi Bu-Seok/Files

However, the medium-term outlook continues to be for dollar weakening, given U.S. Federal Reserve Chairman Ben Bernanke’s pledge to continue with the ultra-easy monetary policy, which would keep the dollar’s yield at a disadvantage to other currencies.

With a fresh batch of U.S. economic data in the form of rising claims for jobless benefits also offering no succour to the ailing dollar, the dollar’s index, which tracks its performance against a basket of major currencies, fell to its lowest level since July 2008 before recovering somewhat.

It is down 1.4 percent so far this week, poised for its worst week since Jan. 22.

“The likely indicator of a reversal in the USD’s (mis)fortunes is global equities. A sustained bout of profit-taking would assuredly spillover into foreign exchange markets, with the EUR and AUD returning back to earth,” said Michael Woolfolk, strategist at BNY Bellon.

For now, that reversal looked unlikely with world equities up by some 5 percent in the past two weeks while Asian stocks outside Japan hovering close to a three-year peak hit on Thursday.

On Friday though, stocks ran out of steam as traders took profits after a recent rally with Australian shares falling by one percent with miners leading losses due to the strong Aussie while rising mortgage rates kept Hong Kong stocks under pressure.

“It’s across the board, apart from the banking sector...the high Aussie dollar is now starting to weigh on this market, particularly with the miners,” Burrell Stockbroking dealer Jamie Elgar said.

The Australian dollar stood at $1.0910, still within easy reach of a 29-year peak of $1.0948, having gained nearly 13 percent since the March lows.

ROARING CREDIT

While equities had a somewhat lukewarm week, Asian credit markets had a smashing one with investors snapping up issuances out of the region and credit spreads narrowing substantially.

Primary markets enjoyed one of their best weeks with Indonesia’s $2.5 billion dollar bond sale garnering blockbuster demand while a Chinese utility company and a Philippine port operator pushed through perpetual bond offerings.

Robust demand for perpetual bonds or perps indicated that investors were scampering to lock in high yielding rates in an otherwise low interest rate environment with outlook positive for yields.

Weekly average of issuances in the first 17 weeks of the year is nearly $2 billion helping the Asia ex-Japan year to date total a whopping $33.45 billion. The weekly average of supply is nearly a fifth higher than the average for 2010.

Elsewhere, the Chinese yuan cracked through the 6.5 per dollar line for the first time, indicating Beijing’s determination to fight inflation and giving a leg up to other currencies.

In commodities, silver consolidated overnight gains after rising to $49.51 per ounce, its highest since 1980, helped by the weakening dollar, while NYMEX crude for June stabilised near the $113 per barrel mark.

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