Dollar gains against pound, yen
Investors look to central banks for future moves to stabilize currency markets and keep cash flowing though global economy.
NEW YORK (CNNMoney.com) -- The dollar rose against the pound and yen Monday, but remained flat against the euro as investors weighed the possibility of further rate cuts from the Bank of England as well as market intervention by the Bank of Japan.
U.S. currency was virtually unmoved against the 15-nation euro, which rose 0.04 cents to $1.394. However, the dollar gained against the British pound, which fell 1.3 cents to $1.482, and rose ¥0.98 to ¥90.11 against the Japanese yen.
Over the past year, central banks around the world have been slashing interest rates and taking other measures to keep money flowing through the global economy.
"(These are) some of the most illiquid markets we have ever seen," said Michael Woolfolk, senior currency strategist at Bank of New York Mellon in New York.
In order to keep the cash flowing in the U.S., the Federal Reserve cut a key interbank lending rate to between 0% and 0.25% last week, the bank's 10th cut since September 2007.
The dollar fell sharply in response, driving up the euro by nearly four cents.
Europe: In an effort to combat the rapid rise in euro value, last week the European Central Bank cut its deposit rate, the rate which the bank pays to deposit money, to 1% less than its own key interest rate.
The idea was to discourage investment from the dollar to the euro because an overly strong euro hurts the domestic economy, according to Woolfolk.
Japan: The Bank of Japan may be poised to take measures to control its currency as well, as it deals with the rising dollar.
"The Bank of Japan is very uncomfortable with the dollar-yen under 100 (yen)," said Woolfolk.
Japan's export-based economy has been suffering as the strong yen undermines overseas sales. The country reported a ¥223.4 billion trade deficit in November as exports fell 26% on a month-over-month basis.
A stronger yen means that profits made in foreign currencies count for less, and if a Japanese company raises prices to compensate, it may see fewer sales.
To compensate, the BoJ could start buying up dollars and selling yen as early as this week, since its key interest rate is already near zero, according to Woolfolk.
UK: The Bank of England, meanwhile, may be poised to offer further key interest rate cuts of its own.
The BoE has been very aggressive in cutting its interest rate, which has weakened the pound but pumped cash into the British economy, Woolfolk said.
The bank "may be prepared to follow the U.S. to a zero interest rate policy," said Woolfolk.
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