Dollar Rebounds

The US dollar rebounded from a week of volatile trading on Friday and the euro to dollar exchange rate fell after data showed a record drop in Euro Zone industrial production. The dollar was also helped by remarks by the Russian finance minister who said that the US dollar’s role as the world’s reserve currency is secure for the near future. Earlier in the year there had been calls by Russian politicians for a different shared reserve currency.

Euro Falls Against Dollar and Yen

The euro was weakened by dismal economic data and fell against the US dollar and the Japanese yen after a newspaper report said that tougher credit terms are hurting German businesses. Brian Kim of UBS AG stated, “Euro zone industrial output disappointed already weak expectations. The data will add to calls for a prompt start to the ECB’s proposed covered bond purchasing scheme and the euro weakened on the news.”

Dollar to Remain Reserve Currency

A statement by Russian Finance Minister Alexei Kudrin helped the greenback and affected currency exchange rates. Kudrin said the US dollar was in “good shape” and added that at present there is no substitute for the dollar as a reserve currency. Kudrin made the statement just days after his superior President Dimitry Medvedev along with Chinese central bank Governor Zhou Xiaochuan suggested the need for an alternative reserve currency. Michael Woolfolk of Bank of New York Mellon stated, “At this point there’s no alternative to the U.S. dollar in terms of deep liquid markets and trading 24-7 globally. Nothing even comes close to the dollar in terms of reserve status.”

Investors Betting US Will Recover First

On Friday the dollar rose against all 16 major currencies except the yen and the euro to dollar rate fell to $1.3854 after hitting a recent high of $1.41. The dollar was also being bolstered by the belief of many forex investors and traders that the US will be the first to recover from the current global recession. Currency exchange rates were also affected by the statements of Japanese Finance Minister Kaoru Yosano who said, that the Japanese government has, “complete trust in the fact that the United States views its strong-dollar policy as fundamental. Our trust in Treasuries is absolutely unshakable.”

Volatile forex trading is expected this week but for now the dollar seems secure.

Euro Falls on Profit Taking

The euro to dollar rate fell as investors took profits on the Euro’s recent rise to $1.41 pushing the euro downward to $1.4003 a decline of 0.4%. Firas Askari of BMO Capital Markets stated, “These are rather violent markets without huge conviction, so when the euro got a bit heavy, people headed for the door.” Goldman Sachs Group advised investors to buy the euro as risk aversion fades and commodities rise and talk of possible alternative currencies put downward pressure on the dollar. In a note to clients the Goldman Sachs foreign-exchange research team wrote; “The dollar has appreciated recently on the back of higher risk aversion. We think this offers a good entry point to go long the euro against the U.S. dollar.”

IMF Says Euro Zone Recovery to be ‘Slow and Modest’

Rising growth expectations have triggered risk appetite and have affected global currency exchange rates. Goldman Sachs believes that higher commodity prices will lead to a weaker dollar. Despite bad news from the euro zone the dollar fell against the euro stalling last week’s dollar rally. On Monday the International Monetary Fund said that recovery in the euro zone would be ‘slow and modest.’ The IMF also dais European banks face $1.2 trillion in losses.

Russia to Cut Back Treasury Purchases

The US dollar was also pressured by Russia’s announcement that its central bank will cut back on purchases of US Treasuries and would purchase IMF-backed bonds instead. The Euro’s rise to above $1.41 triggered automatic sell orders and pushed the currency back down to $1.3982. Firas Askar of BMO Capital Markets stated, “These are rather violent markets without huge conviction, so when the euro got a bit heavy, people headed for the door.”

Investors Concerned About US Rates

The Aussie and Kiwi dollars were winners on Tuesday. The Aussie dollar rose 0.3 percent to 80.40 while the Kiwi dollar rose 0.4 percent to 62.95. In the last three months the Aussie and Kiwi dollars have gained 24% on the US dollar making them top performers in Forex markets. Investors remain concerned about whether the US will raise rates by the end of the year. Rising rates would be a sure indication that recovery is underway. Richard Grace of the Commonwealth Bank of Australia holds a pessimistic view, “The Federal Reserve is not going to be raising rates anytime soon. As U.S. two-year bond yields fall, the U.S. dollar will fall with them, and we’ll see Aussie, sterling and euro head higher.”

Declining Demand For the Dollar

The declining demand for safe haven investments has put heavy downward pressure on the US dollar. Newly released US housing data reinforced investor optimism that the worst of the global recession may be over. Early Tuesday the dollar made some gains but these were lost as the New York trading session opened. In April pending home sales in the US posted the biggest gains in 7 ½ years indicating that the US housing market is recovering.

Risk Appetite Affecting Commodity Prices

The rise in risk sentiment has affected global currency exchange rates and is also influencing commodity prices such as oil. Vassili Serebriakov of Wells Fargo Said, “The overall sentiment in the market remains dollar negative. This whole story about a financial market recovery and stabilization of the global economy has encouraged people to take on more risk and buy commodity currencies essentially against the U.S. dollar.” Commodity based currencies like the Aussie and Kiwi dollars have preformed well in recent forex trading sessions.

Current Rates

The euro to dollar hit a yearly high $1.4332 on Tuesday and last traded at $1.4320, a daily increase of 1.1%. The AUD/USD climbed to a high of $0.8232 and was trading at $0.8210. Rising risk appetite affected other currency exchange rates. The commodity based New Zealand dollar hit an eight month high of $0.6595.

Russia Wants New Reserve Currency

US Treasury Secretary Timothy Geithner’s remarks failed to assuage concerns about the dollar’s strength. The Chinese government, the largest holder of US debt, expressed concerns about rising deficits and the strength of the dollar. Currency exchange rates were also affected by remarks by Russian President Dmitry Medvedev that the world needs a larger variety of reserve currencies.

Some Say Dollar Downtrend Extreme

Some currency analysts are concerned by the speed and extent of the dollar’s recent decline and its affect on currency exchange rates. Brian Dolan of Forex.com stated, “More and more talk has been circulating that the current dollar downtrend is becoming extreme. While we still have no concrete technical indications of a reversal, we are becoming increasingly cautious on chasing the dollar lower and today’s modest new highs versus yesterday’s suggests the short dollar trade has become more crowded.”

Dollar at Five Month Low

The US dollar is at its lowest this year against major currencies including the euro. Rising stocks and data indication that a recovery is underway have caused a sell off of dollar denominated assets as investors seek higher yielding currencies. The dollar did recoup some losses after data revealed that US inflation rose more than had been predicted and manufacturing showed a slower rate of contraction. Shaun Osborne of TD Securities stated, “Generally, this is still a case of better-than-expected data not necessarily good for the U.S. dollar. We expect no rebound in sight for the dollar just yet.”

Commodity Based Currencies Big Winners

The euro to dollar exchange rate gained 0.2% and traded at $1.4178 it’s highest since December. The Pound to dollar rate rose to its highest in seven months and traded at $1.6436. Commodity based currencies such as the Aussie and Kiwi dollars were the big winners as investors sold dollars and bought commodities. Brian Dolan of Forex.com said, “This is a market that is in the process of selling the dollar against everything, buying commodities, and that should continue today.”

Dollar Gains on Yen

The dollar to yen rate gained 1.1% and the yen traded at 96.31. The yen is widely believed to be the safest forex currency and traditionally falls as risk appetite increases. Currency exchange rates were also affected by the news that General Motors had filed for bankruptcy. Washington has pledged an additional $30 billion to rescue GM fueling investor concerns about massive US deficits and how they will be financed.

Euro Zone Data Better Than Expected

Positive data from the Euro Zone also affected currency exchange rates. The Euro Zone PMI manufacturing index rose to its highest in seven months. The UK Manufacturing PMI was also higher than expected. Recent data showing that the recession is easing has weighed heavily on the dollar and most experts expect this trend to continue in the near future.