Dollar strengthens as investors head for safety

The US dollar gained today against the euro and the Canadian dollar, driven by the prevailing risk-off sentiment.

The big story over the last few days has been how investors have been reshuffling their assets in order to suit the changing dynamics of monetary policy.

Ever since Fed Chairman Ben Bernanke spoke in his press conference last week about what had previously been speculation, namely that the Fed is likely to taper its monthly asset purchases later this year, we have been seeing a rethink of how market participants view liquidity.

This has led to a slump in stock prices, a general lack of demand for risk commodities, rising yields in long-term US treasuries and strength in the US dollar. Monetary stimulus generally acts to debase a currency, with all things being equal, and therefore a lowering in the expectations for future stimulus has proven beneficial to the dollar.

EUR/USD climbed 0.16% to 1.3142 by mid-afternoon in New York, while USD/CAD rose by the same percentage to 104.73. Earlier in the session the US dollar hit its highest level against the Loonie since October 2011.

The Canadian dollar has been struggling along with other currencies, such as the Australian dollar and the New Zealand dollar, that are tied to economies heavily reliant on commodity exports.

Commodity prices have not only been hit by the expectations for stimulus but by a steady stream of bad news out of China. Last week PMI manufacturing data for China showed a contraction, falling to a nine-month low, and overnight the Chinese stock market saw steep falls after the People’s Bank of China suggested the era of cheap credit could be ending.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

Find articles by analysts

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.