Dollar Has Great Month

The news from the Euro Zone keeps getting worse and worse causing market volatility. The US dollar had its best month since October as it rose against the beleaguered Euro as Forex traders and investors sought safe haven. Lately there has been a back and forth between risk appetite and risk aversion but for Forex traders risk aversion seems to be dominant.

Massive Unemployment and Inflation

Worsening conditions in the Euro Zone caused the Euro to fall against both the US dollar and the Japanese Yen. Recently released data showed massive unemployment and inflation. Although markets expected a 5.4% decline in the US economy figures showed that the US economy actually shrank 3.8% in the last three months of 2008. This, in turn, helped to bolster the dollar for Forex traders.

US Economy to Slow in 2009

Many analysts expect the US economy to slow even further in 2009 but many Forex traders believe that although this will weaken the global economy further it will also make the Dollar more attractive as a safe haven currency. Vassili Serebriakov of Wells Fargo in New York said, “The dollar has been displaying resilience to bad economic numbers. There’

s some question about whether continued accumulation of very weak data will weaken this resilience, but for now, I think it suggests risk-aversion is still driving the currency market.”

Trading Driven by Risk Aversion

Forex trading has been driven by risk aversion lately with slight returns to risk appetite occasionally. This benefits both the US dollar and the Japanese Yen. The Yen benefits as Forex traders sell riskier currencies and assets that were financed by the inexpensively bought Yen. The US dollar benefits as Forex traders repatriate the currency into US treasuries.

Credit Downgrades

The Euro was down 1.2% and was trading at $1.2804, down 8.4 in January. Last month Standard & Poor’s downgraded the credit ratings of Spain, Portugal and Greece which Forex traders said hurt the Euro even further. In addition Moody’s Investor Service’s downgraded Ireland’s long term debt outlook which hurt the Euro even further.

Forex traders certainly have their work cut out for them in today’s volatile currency markets. The outlook for 2009 is not good and Forex traders will be looking for any opportunities that may arise.