Dollar Gains on Risk Aversion

The US dollar gained on Friday as US corporate earnings showed mixed results prompting a slight return to risk aversion. Corporate giant General Electric reported that second quarter profits fell by almost 50% while Citigroup posted smaller than expected losses. Earlier in the week Goldman Sachs, Intel, and JP Morgan posted stellar earnings but investors remained concerned about the health of the economy which affected currency exchange rates. Steven Butler of Scotia Capital stated, “There’s reason for optimism, but it seems we need to see a grand slam for people to get carried away. This underlines that the market is still skeptical and afraid to get overextended.”

Euro Fails to Hold Gains

The euro which had traded at $1.41 earlier in the week failed to hold on to earlier gains reflecting uneasiness among investors. The euro has fallen 0.5% to $1.4075 against the dollar and fell 0.5% against the yen trading at 132.10. The pound also fell against the dollar losing 0.9 % and traded at $1.6285. Many forex traders and investors felt that markets had no clear direction last week making trading difficult. Last week’s bombings in Jakarta Indonesia sent short lived shockwaves through global forex markets. Melvin Harris of Advanced Currency Markets said, “There’s still an underlying tone of risk aversion looming. People don’t feel comfortable with the economy.”

Dollar Pares Losses

The US dollar ended last week by recovering losses suffered earlier in the week after earnings posted by Goldman Sachs and Intel lifted risk sentiment prompting investors to seek higher yielding currencies and assets. Markets ignored euro zone trade data that showed a 1.9 billion euro surplus and comments by Japan’s top financial diplomat who said the US dollar would remain a core asset of Japan’s foreign currency reserves.

Next Weeks Economic Calendar

Next week’s economic calendar includes June’s leading economic indicators which are due Monday. On Wednesday the weekly report on U.S. petroleum supplies is due and on Thursday weekly jobless claims and the report on June’s existing home sales are due.

Risk Appetite Pressures Dollar

The US dollar fell to a one month low against a basket of major currencies as positive data from Goldman Sachs and Intel bolstered forex investor and trader optimism about the direction of the economy. Other data showed that some factories in New York State showed signs of recovery lifted risk sentiment and put downward pressure on the greenback. Brian Dolan of Forex.com stated, “Intel’s earnings got things kicked off yesterday, and the U.S. data just improves the outlook, so all lights are flashing green for investors to take on risk.”

Investors Bet on Corporate Earnings

Currency experts said that investors are betting that other US corporations will post solid second quarter earnings. Steve Barrow of Standard Bank in London said, “The market may be expecting more pleasant surprises rather than unpleasant surprises from earnings.” This week results are expected from approximately 30 US corporations. JPMorgan Chase & Co will post results on Thursday and Citigroup Inc and Bank of America Corp will post earnings on Friday.

Euro Trades at $1.41

One indication of revived risk appetite was data from Bank of New York-Mellon which showed that the euro was the most bought currency on Wednesday. The euro had been pressured by recent risk aversion. The euro was up 1% on Wednesday at $1.4104. Some traders believe that euro bond redemptions may limit gains for the euro. 60 billion euros worth of bond redemptions are due this week with 36 billion euros due Wednesday. Antje Praefke of Commerzbank in Frankfurt stated, “If funds from those redemptions go back into euro assets, it won’t be an issue, but if for example some of it goes back to Japan, euro-yen may fall.”

Canadian Dollar Up Against US Dollar

The Canadian dollar reached a one month high against the US dollar. The Loonie rose 1% against the US dollar for a one month high of C$1.1185. The commodity based Australian dollar also rose 1% against the greenback. Many currency experts expect volatile forex trading for the rest of the week.

Japanese Ruling Party Suffers Defeat

Markets shrugged off the results of Sunday’s Japanese elections. The ruling Liberal Democratic Party suffered a major defeat in Sunday’s elections. Takeshi Minami of the Norinchukin Research Institute stated, “The timing is not surprising and I don’t think that this will have a major impact on the market. The market has already factored in a defeat for the LDP. The focus is on how the (opposition) Democratic Party will manage politics. Foreign investors don’t have a clear idea about the Democrats.”

Yen Steady Against Major Currencies

The yen held steady against other major currencies and forex traders expect the yen to take its cue from equity markets. An unnamed trader from a European bank said, “Equities fell globally last week with U.S. shares falling for the fourth straight week, and the key is whether that will continue.” Risk aversion has dominated forex markets as investors remain concerned about second quarter corporate earnings and the health of the financial industry. The yen rose on Friday posting its biggest weekly gain against the US dollar since October.

Declining US Consumer Sentiment

A report showing declining US consumer sentiment in early July raised risk aversion benefiting both the dollar and the yen. Also boosting the dollar and yen was last week decline in equities and oil prices and forex investor perception that earlier economic optimism may have been premature. Dismal employment from the US triggered a return to risk aversion last week.

Pound Pressured by Times Report

The British pound was hammered by a report in the Sunday Times which said the banking giant Lloyd’s may post losses of 13 billion pounds. ($20.9 billion USD) Also affecting currency exchange rates was a Wall Street Journal report that American Airlines and Delta may file for chapter 11 bankruptcy. Yousuke Hosokawa of Chuo Mitsui Trust & Banking Co. stated, “The Times report rekindled concerns about the health of the financial system in Europe, which is believed to have a bigger exposure to non-performing loans than U.S. banks.”

Investors Waiting for Second Quarter Corporate Earnings

Risk aversion is back as investors await US 2nd quarter corporate earnings. Poor performance, particularly from banks and financial institutions, will likely drive up demand for the safe havens of the US dollar and the Japanese yen. The return to risk aversion has already affected currency exchange rates putting downward pressure on high yielding currencies like the Aussie and New Zealand dollars.

Mixed Economic Signals

Currency experts have been receiving mixed signals on the global economy. Fabian Eliasson of Mizuho Corporate Bank stated, “We’ve been getting very mixed signals, with some positive data and some very poor data, so it’s extremely difficult to pinpoint direction. As a result, people are backing out of high-yield assets and into the yen and dollar. Now, the focus will turn to corporate earnings as the main driver for the market.”

The G 8 Summit

Also affecting currency exchange rates is the G 8 summit which started Wednesday in Italy. China and Russia had been expected to force a discussion of an alternative reserve currency but at present no such discussion has taken place. Chinese President Hu Jintao who was to attend the conference returned to China to deal with the unrest and violence in the Xinjiang region.

Yen at Month High Against the Dollar

Japanese investors, betting that US corporate earnings will drop are repatriating assets pushing the yen to its highest level against the dollar in a month. Hidetoshi Yanagihara of Mizuho Corporate Bank stated, “The risk-aversion trade is still prevailing in the market. Everybody is now aware that it might take some time to see a real recovery of the U.S. economy.”  Currently the dollar to yen rate is 94.75.

Both the euro and pound declined against the dollar. The euro to dollar rate is at $1.3915 and the pound to dollar rate is at $1.6121. Forex investors are concerned that new efforts to stimulate the UK economy will result in a debasement of the pound. For the next few days the G8 conference is expected to influence global markets.