Brokers' notes: Dollar hurt and gold erases some of the gains early today

China hurts the dollar again. Reports that China has bought "quite a lot" of European bonds according to a former adviser to the People's Bank of China who was part of a foreign-policy advisory committee that visited France, Spain and Germany from June 20 to July 2 resulted in a selloff in US dollar and gains in EUR. Substantiating these came the Treasury International Capital flow report from US which showed total demand for dollar denominated securities falling by $6.7 in June, buying US dollars has become increasingly unfashionable. Although long-term Treasuries remain in demand, China and oil exporting countries were net sellers of dollars in June. China sold $24B US dollars in the month of June. Between May and June, China sold more than $55B worth of dollar denominated securities. During that same time China bought more than $13B worth of Japanese Yen. China has been an aggressive buyer of Japanese Yen throughout 2010 as well as a big buyer of euros. This concern about central banks diversifying out of US dollars was the main reason why the US$ was sold.

The US dollar headed toward a 15-year low against the yen on Tuesday and Japanese shares slid on the weak US data. Investors await a raft of US data released later in the day, including July housing starts data at 1230 GMT, for fresh clues to the health of the world's biggest economy. Data showed on Monday that US home builder sentiment hit a near 1½ year low in August and a regional manufacturing gauge grew slower than expected, fanning concerns the economic slowdown is continuing into the third quarter. The dollar index, a gauge of its performance against a basket of six major currencies, fell 0.2 per cent to 82.345. It lost 0.6 per cent the previous day as traders decided the currency's huge 3.1 per cent rally last week was overdone.

UK sterling rose against the dollar on Monday, clawing back after sliding to a three-week low earlier and tracking the euro's rise against the dollar as risk appetite improved. A fall in UK house prices, however, put sterling under some selling pressure against the euro. Risk sentiment turned higher, boosting the euro and the pound against the dollar, after the European Central Bank said it bought minimal government bonds from the euro zone last week, placating concerns about economic weakness in some parts of the region. From a technical perspective, the pound is seen supported versus the dollar so long as it remains above its 200-day moving average at $1.5504. A break below that marker could open the door to further losses towards $1.5320, the 38.2 per cent retracement of its recovery from a May low around $1.4230 to recent highs just shy of $1.6000. The latest IMM positioning data showed speculators were net long on sterling in the week ended August 10 for the first time since mid-2008.

Economic problems in euro zone are far from over. According to the Bank of Portugal, Portuguese banks borrowed 21 per cent more from the ECB in the month July compared to June. This indicates that despite the relief the stress tests have brought to investors, financial institutions in Portugal are still struggling to raise money in the capital markets. The Central Bank of Greece also said that borrowings from the ECB increased 2.5 per cent. Like Ireland, none of the Portuguese banks failed the stress tests and ATEbank was the only Greek bank to fail the tests. Theoretically the stress tests helped to restore confidence in the European financial markets but practically it failed to help the weaker countries in the Euro zone get financing which serves as a harsh reminder that the sovereign debt problems in Europe are not behind us.

Gold erased some of its early gains on Tuesday but held near its strongest level in more than a month on worries about global economic recovery, while jewellers were also happy to cash in on high prices. With weak economic growth around the world igniting talk of deflation, investors are likely to chase gold, US Treasury and currencies seen as safe harbour such as the yen and Swiss franc. Other precious metals tracked gold higher.

Crude was steady near a one-month low on Tuesday on signs of a withering global economic recovery, following disappointing data from the United States and Japan, the world's largest and third-largest oil consumers. The economic slowdown has raised doubts that demand growth from China, the world's second-biggest oil user, will revive a range bound crude market. And forecasts ahead of weekly US petroleum inventory reports are for gasoline stockpiles to have remained little changed last week.

Source: Richcomm Global, Dubai, www.richcommglobal.com