The US currency remains under downward pressure. The negative impact of last week’s disappointing labor market report on the markets was only short-lived. Some commentators were actually of the opinion that the job losses were boosting equity markets and weighing on the dollar, arguing that the weak labor market is enabling the Fed to continue to maintain its expansionary monetary policy.

As before, the forex market reacted very sensitively to suggestions that the dollar’s international standing might be jeopardized. At the beginning of the week, it was rumored that oil producers in the Middle East and importers in China and Japan were discussing the possibility of no longer factoring oil transactions in dollars.

This report intensified fears that members of the Gulf Cooperation Council, which are planning to introduce a common currency in 2010, could loosen their currencies’ peg to the dollar.

Then, early on Tuesday morning, the Reserve Bank of Australia surprised financial market players by raising interest rates from 3.00 to 3.25%. Australia is thus the first big advanced economy to increase interest rates.

The Australian dollar soared on the RBA’s decision to hike interest rates so early. AUD-USD rose more than 4% to over 0.90, the highest level since August 2008. Together with the Australian dollar, the Canadian dollar, Brazilian real, New Zealand dollar and South African rand strengthened too. A new gold price record gave the rand additional support, as gold rose to $1061 per troy ounce.

Up to now, central banks in the industrialized countries had held the common view that, given the macroeconomic risks, interest rate hikes were not an option. Market participants are now focusing their attention on which countries will tighten the reins next. The development of interest rate spreads is becoming more important again.

The ECB is not tipped to raise rates at the moment. The introductory statement to Thursday’s ECB governing meeting only shows a slight improvement to the assessment of the macroeconomic situation. In September, inflation was seen as “remaining subdued over the policy-relevant horizon”. Now the ECB is expecting inflation rates to be “moderately positive”. However, the ECB is still expecting the recovery to “remain rather uneven”.

This week exchange rate movements are likely to depend to some extent on whether the upbeat mood in equity markets continues as the reporting season progresses. During the course of the week, the big US banks are publishing their third-quarter earnings. The minutes of the FOMC meeting on 14 October will also be in the spotlight. The latest comments of Fed representatives show that in the US, discussions about the right timing for tightening monetary policy are underway. Fed Chairman Ben Bernanke said that the Fed would have to raise interest rates at some point, in order to keep inflation under control. It will be interesting to see whether this was discussed at length at the Open Market Committee meeting.