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This morning’s FX View from IB:

The dollar retreated on Friday as investors responded to President Obama’s proposal to limit banks’ risk taking. One could argue the direction of the dollar either way. A safer and less risky world would likely result in weaker but steadier earnings but promote currencies other than the dollar. The crimp on banking income seems to be the view in ascendancy so far today. On the other hand, by taking away the banks’ ability to generate returns from promoting risks, one could argue that growth will slow and as such risk aversion will rise leading to a classic case of seeking the dollar as a safe haven.

U.S. dollar – The immediate response, however, was to sell the dollar on worries over a profit squeeze. After a rather strong week for the dollar this latest political episode is not deemed as a catalyst for further dollar strength at this time. Indeed the Obama plan brings the number of market negative stories for this week to a grand total of three, following the impact on the euro from concerns over Greece earlier this week coupled with China’s actions to curb bank lending. Having rallied sharply during the week, investors have decided that despite all of the hubbub and the descent of swirling fears on global markets, none of these events together or in isolation is set to derail what really matters – the global economic recovery.

However, the dollar is still likely to trade inversely to the S&P 500 index and with a disappointing earnings result from General Electric setting in motion a reversal from black to red in pre-market trading it’s too early to conclude that the recent bout of dollar strength can be brushed off.

British pound – The pound rallied sharply overnight only to face the tough hurdle of what turned out to be the weakest retail sales report for the month of December since 2007. Analysts expecting a rise of 1.1% over the previous month were flawed by a mere 0.3% gain. The report confirms that growth is anemic in the British economy and mirrors the message from weak bank lending data also released this week. It’s also a comfort to note that the earlier inflation data is precisely what the Bank of England voiced after the report when governor King blamed the spike in prices on temporary factors. The price spike does not come from heated demand. The pound recoiled from an overnight peak of $1.6284 and is back down on the day at $1.6155. The pound also gave up ground to the euro and trades currently at 87.50 pence.

Japanese yen – An overnight 2.6% plunge in stocks was met with a rally in the value of the yen, which reached ¥89.79 against the dollar overnight, but has since eased to ¥90.15. At its weakest point overnight the yen retreated to ¥90.56. Investors may ultimately question the move into the yen if they conclude that the U.S. plan to curb banks’ risk taking is likely to prove less onerous on financial markets or that it lacks teeth given it still requires congressional approval.

Euro – The euro is coming back from the dead after reaching $1.4029 on Thursday and stands more than a penny higher at $1.4133 on Friday. New industrial orders for November rebounded to a 1.6% monthly gain and surprised the market only seeking a gain of 0.5%, which provided a dose of support to the single European currency.

Aussie dollar – An overnight rebound took the Aussie dollar to as high as 90.92 U.S cents before sliding back to its current 90.26 cents although it is still higher on the session. Investors unwound some leveraged trades buying yen to sell Aussie dollars, which helped keep a lid on a nevertheless positive performance. In the aftermath of the Obama plan to regulate banks further, an Australian report suggested that the government might seek to tax mining companies that have made bumper profits from sales of iron ore and coal in the bullish environment for commodities.

Canadian dollar – After a weak turn out for inflation earlier in the week, retail sales also disappointed – just as they did in the U.K. today. The Canadian dollar finds itself in a sticky situation as a result this morning with pervasive weakness in crude oil and metals prices not helping weaker economic data. As a result the local dollar slumped to stand at 94.73 for a near half-penny loss today.

Source: IB