London: The dollar hit its lowest level of the year against a currency basket on Monday, stung by buoyant risk demand as stocks rallied on the back of solid bank earnings and surprisingly strong manufacturing sector data from Europe.
Currencies seen to be higher-risk climbed as European shares hit their highest of 2009 after the bank results while strong purchasing managers’ indices from the euro zone and UK added to evidence that the worst of the global economic downturn may be over.
The euro hit a two-month high against the dollar of $1.4326 (Rs68.62) according to Reuters data, while sterling and the Australian and New Zealand dollars hit their strongest since autumn.
“The outperformance of pro-cyclical currencies against the dollar has to do with not only with higher equities but oil prices as well,” said Phyllis Papadavid, currency strategists at SG in London.
“In the absence of horrific news, the market goes into default mode (to buy risky assets).”
The dollar index, a gauge of the US currency’s performance against six other major currencies, fell to 77.978, its lowest since December, as oil prices rallied more than 2% to a one-month high above $71 per barrel.
Also helping to batter the US currency was a 1.6% jump in European shares to their highest since November as HSBC reported that profits halved from a year ago, but were still ahead of forecasts.
HSBC’s announcement followed news that Barclays reported an 8% rise in half-year profit, though bad debts at the bank almost doubled.
Sterling rose to its highest since late October of around $1.6880, helped by both the UK banking earnings and a surprisingly strong UK purchasing managers’ index reading.
Among commodity-linked currencies, the Australian dollar hit its highest since late September at $0.8410 while the New Zealand dollar rose to $0.6680, its strongest since October.
The Canadian dollar rose as high as C$1.0677 (Rs48.1) per USdollar, also its strongest since October.
Traders said the Australia was being supported by expectations that the Reserve Bank of Australia may drop a key reference on monetary easing at its policy meeting on Tuesday while keeping the cash rate unchanged at 3%.
The UK purchasing managers’ index for manufacturing rose to 50.8 in July, moving into positive territory for the first time since March 2008, while an equivalent survey on the euro zone was also better than expected, further lifting optimism on the global economic outlook.
Market participants are awaiting the key ISM (Institute for Supply Management) survey on manufacturing activity in the US later in the day, which is expected to show a rise to 46.2 in July from 44.8 in June.
“I still see the market positive on risk—it would need very negative numbers out of the US to dent risk appetite,” said Nordea currency strategist in Copenhagen Niels Christensen.
In addition to the Reserve Bank of Australia, markets are also anticipating policy decisions from the Bank of England and the European Central Bank later this week for clues on each central bank’s outlook for the economy and monetary policy.
Jessica Mortimer contributed to this story.