Commodity Currencies Gain as Dollar Low

Commodity currencies were gaining as dollar weakness helped prompt a rebound in commodities and corresponding currencies. The Australian dollar was up 0.6% against the dollar at $1.07658, the Norwegian Krone was 1% higher at $0.18234, the New Zealand dollar, or kiwi, was rising 0.4% at $0.79344 and the Canadian dollar was up 0.2% at $1.03624.

Commodities are frequently sought as a hedge against inflation and a weaker U.S. dollar. Meanwhile, a weaker-yielding U.S. dollar allows it to be used as a funding currency for riskier trades in commodity currencies.

"Also aiding commodity prices was European Central Bank [President] [Jean-Claude] Trichet not being as hawkish as he had been going into the ECB meeting," says Dean Popplewell, Oanda chief currency strategist.

Last week, European policymakers left the key interest rate unchanged at 1.25%, and during a press conference that followed, Trichet spoke less hawkishly than expected -- dampening expectations of a rate hike in June.

The Canadian dollar, also higher against the euro -- up 0.2% at EUR 0.72364 -- "has all the natural resources that the rest of the world wants, says Popplewell, who notes that the Canadian dollar is a "prime example" of the strong correlation between commodity currencies and the underlying asset. Popplewell notes a roughly 90% correlation between the direction of commodity currencies such as the Canadian dollar and commodities such as oil and gold. Commodity currencies receive this label from their economy's dependence on commodities production.

The June crude oil contract gained $5.56 to trade at $102.74 a barrel. Gold for June delivery was up by $11.60 at $1,503.20 an ounce. The July silver contract added $1.83 at $37.12 an ounce.

Despite gaining against the world's most heavily-traded currencies, the Canadian dollar was underperforming relative to other commodity currencies versus the dollar and sliding against traditional safe-haven currencies such as the Swiss Franc -- down 0.4% at CHF 0.9050, which Popplewell attributes to traders who are still jittery following last week's broad sell-off of commodities -- one that saw silver plunge over 18% over the past five days -- amid a spate of weak jobs reports; more concerns about debt-laden Greece; and the CME's third margin hike in just a few days, which forced many traders and funds to liquidate positions.

The U.S. dollar index was weaker by 0.3% at $74.70.

"While we had been looking for the dollar to weaken in 2011, the fall has been more rapid and larger than we had expected," David Bloom, HSBC's global head of FX strategy research said in a note.

Bloom says the ongoing dollar weakness and skepticism about the dollar's role as the main reserve currency has been sustained with the shift in attention on Europe's fiscal problems to a renewed focus on the U.S.' debates on how to handle the country's looming debt ceiling, and the credit rating outlook warning from Standard & Poor's.

"At the same time, the U.S. economic data has been soft enough to keep interest rate expectations in check, but not weak enough to increase concerns about the sustainability of the recovery," Bloom says.

"This has allowed risk appetite to remain strong," with the dollar used as a funding currency for risk asset trades.

Precious metal and oil stocks were rebounding with the commodities with Marathon Oil(MRO_) spiking 5.3% to $52.20 and Hess(HES_) rising 3.3% to $80. Goldcorp(GG_) was 1.7% higher at $49.74 and New Gold (NGD_) was popping 3.2% to $10.04.

Hecla Mining(HL_) was jumping 5.6% to $8.54, Silver Wheaton(SLW_) was up 2.4% to $36.66 and Pan American Silver(PAAS_) was spiking 3% to $34.21.