U.S. Dollar: China’s Big Night

It has been an extremely active day in the currency market with the U.S. dollar rising to a 5 month high against the euro. Dollar bulls were in full control today as the greenback strengthened against every major currency. Although we would have liked to say that the dollar has risen on stronger growth prospects in the U.S. – it was the fear of a slowdown in the global recovery that sent investors back into the safety of U.S. dollars. It is no secret that the global recovery has been driven largely by growth in China and the country’s recent initiatives to slow their economy has sent shockwaves across the financial markets. Last week, China raised reserve requirements and yesterday they increased their T-bill rate. Today they announced plans to control the pace of credit growth and there has even been speculation that they will restrict bank lending. These announcements indicate that China is growing nervous about their about inflation and asset bubbles and to prevent the economy from crashing down, they are slowly pressing on the brakes. Unfortunately at a time when the global recovery is still fragile and the world really needs continued demand from China, currency traders are reacting negatively to any risk of that demand slowing.