FX Roundup: Dollar gains ascendency, yuan strengthens

The dollar rose against a basket of global currencies on Tuesday, while the yuan strengthened after the People’s Bank of China set the mid-point for the currency at CNY6.5628 per dollar, just two pips weaker than the previous strong fix and firmer than its spot levels late on Monday.

The spot yuan weakened from its overnight close to 6.5733 to the dollar, but offshore it strengthened as much as 180 pips to 6.5660.

Jane Foley, senior FX strategist at Rabobank, said, “A 1.5% decline in the EUR/USD hardly turns heads these days, but a 1.5% decline in the yuan spawns strong selling in global equity and emerging market currencies, whilst plunging commodity prices stoke global deflation fears. One reason why the market is watching China so intensely is that all big economic regions have their own issues, so a weaker China means no spender of last resort.

“Beyond the above-mentioned channels of contagion, however, things are less clear-cut. US and European banks have only limited exposures to China (less than 4%) and so direct comparisons with either the US subprime or the European sovereign debt crisis fall short.”

Elsewhere, the US National Federation of Independent Business’ index of small business optimism edged higher in December by 0.4 points to 95.2, but remained well below the gauge's 42-year average of 98.0.

At 1628 GMT, the dollar rose 0.05% against the yen to change hands at JPY117.800. The euro shed 0.21% against the dollar to change hands at $1.0836, while the greenback exchanged Swiss Francs at CHF1.0042 up 0.27%.

Meanwhile, the pound’s woes continued as it sank to a fresh five-and-half-year low, changing hands for the US currency at $1.4393, down 1.03% on poor industrial data. Industrial output fell 0.7% in November from October; the sharpest fall since the first quarter of 2013, according to data published by the Office for National Statistics.

Concurrently, manufacturing output fell 0.4% for a second month running, with a decline in pharmaceutical production having the biggest impact on the total figure..

Meanwhile, major commodity linked currencies took another predictable hammering with Brent oil futures staying low, and natural resources enduring another torrid session on the London Metal Exchange.

The greenback rose 0.39% versus the Canadian dollar changing hands at $1.4272. The beleaguered Australian dollar shed 0.27% against its US counterpart exchanging at US$0.6976, while the New Zealand dollar was down 0.44% exchanging at US$0.6531.

In Latin America, the dollar traded higher against major regional crosses including the Colombian (up 0.07%) and Mexican (up 0.27%) pesos, but stayed broadly flat versus the Brazilian real (down 0.10%).