’Undervalued’ dollar rallies Financial times of London

’Undervalued’ dollar rallies
By Neil Dennis

Published: October 8 2007 11:49 | Last updated: October 8 2007 11:49

Gains for the dollar resumed on Monday following better-than-expected US employment data and comments from the IMF about the “undervalued” currency.

The greenback pushed higher against the euro, sterling and yen, but the calming effect on the foreign exchange market of Friday’s unexpectedly strong US non-farm payrolls data encouraged carry trades, lifting the Australian and New Zealand dollars.

The carry trade, where low-yielding currencies like the yen are sold to fund purchases of higher yielding assets and currencies like the Kiwi or Aussie dollars, was back in fashion following some weeks of markets volatility and risk aversion.

“Risk taking appears to be recovering more quickly than we had thought, and We have revised higher our forecasts for the Aussie and Kiwi,” said Stephen Halmarick at Citigroup.

The New Zealand dollar was up 0.8 per cent against the yen to Y89.74, while the Australian dollar rose 0.5 per cent to Y105.50.

The yen was down across the board. The US dollar rose 0.4 per cent to Y117.40, the pound rose 0.2 per cent to Y239.20, while the euro was up fractionally to Y165.39.

Friday’s US payrolls data provided some momentum for the dollar’s rebound, lifting hopes for a soft landing for the US economy which has been hit by a weak housing market.

The dollar also gained support from continued verbal intervention, following comments in recent weeks from European politicians and policymakers voicing concern over the euro’s strength.

Rodrigo Rato, head of the International Monetary Fund, concentrated his remarks on the weak dollar, however, saying the US currency was overvalued.

He added that recent financial and economic developments created a ”new scenario for global imbalances that policymakers should ”keep an eye on”.

The dollar climbed 0.3 per cent to $1.4084 against the euro and by 0.3 per cent against sterling to $2.0365.

Copyright The Financial Times Limited 2007