Euro Gains on Positive Data

_The euro made gains on the US dollar as better than expected economic data from the Eurozone showed that growth returned to the two largest European economies, Germany and France. The dollar was also pressured by demand for higher yielding assets. The results of the FOMC meeting showed that the recession in the US may be nearing its end sparking demand for high yielding currencies such as the Aussie and Kiwi dollars. As many experts expected the Fed will keep rates near zero in an attempt to spur recovery.

Eurozone to Return to Growth in

2010

In its monthly bulletin the European Central bank said that the Eurozone economy would return to growth in 2010. The euro/dollar exchange rate was up 0.5% to $1.4270 and the euro rose 0.8% against the yen to 137.49. Many currency strategists believe further euro gains are unlikely for now.  Adam Cole of RBC Capital Markets in London stated, “What we really need to see for the euro to run any further is some evidence from leading indicators that growth is actually turning positive at the moment. So there is a limit to how far it can run until we get some convincing evidence that Q3 is likely to be positive.”

Aussie and Kiwi Dollars Gain

Both the Aussie and Kiwi dollars rebounded from recent losses and the Aussie dollar rose 1.2% to $0.8419 while the Kiwi gained 0.9% and traded at $0.6761. While risk sentiment has improved some remained cautious about the Fed’s decision to extend asset purchases and believe the action shows that the US economy is still vulnerable. Many forex traders and investors are awaiting U.S. retail sales data. Stuart Bennett of Calyon in London said, “If the market decides to buy the USD on the back of the more upbeat headline, we could see a similar USD rally as after last Friday’s employment report.”

Fed Won’t Raise Rates Until 2010

A survey taken by Reuters showed that a majority of dealers expect the US recession to end this quarter and do not expect the Fed to raise rates until 2010.

Dollar Rally Continues

The US dollar held on to Friday’s rally in Monday’s trading session. Forex traders and investors are waiting for the results of the Federal Reserve meeting which began Tuesday. The euro fell slightly against the dollar from 1.4193 to 1.4135. The dollar slipped slightly against the yen from 97.51 to 97.17.  Better than expected US employment figures are responsible for the dollar’s rally last Friday.

Dollar’s Rally Unusual

Many Forex traders and currency experts found Friday’s dollar rally unusual due to the fact that the dollar has been largely bolstered by its ‘safe haven’ status. During the current recession the dollar usually gains on bad economic news and is pressured downward when risk sentiment rises. Terri Belkas of  Forex Capital Markets state, “This coming week of price action in response to the Federal Reserve’s rate decision and US retail sales will be important as a gauge of what will drive the US dollar going forward: economic data or risk appetite.”

Correlation Between Dollar and Risk Sentiment Fades

Many other experts are also seeing the correlation between the dollar and risk sentiment fade. Referring to market reaction to Friday’s US employment figures Lee Hardman of Tokyo-Mitsubishi UFJ said that the data was, “the clearest signal yet that the negative correlation between improving risk sentiment and a weaker dollar is beginning to break down. The positive reaction of the dollar to stronger US economic activity is a function of increasing Fed tightening expectations.” Commerzbank currency analyst Ulrich Leuchtmann stated, “We see this as a first sign that the old trading pattern ‘good US data equals weak dollar’ has been clearly eroded and that investors can no longer unilaterally interpret good news from the US negatively for the dollar.”

FOMC Statement Due Wednesday

At present most Forex traders and investors are keeping a close eye on the Federal Open Market Committee. The decisions of the central bank could spark volatility in Forex markets. Most experts believe that the Fed will maintain extraordinary measures to stimulate growth until the recession shows sure signs of recovery.

Dollar Gains on Positive US Data

The US dollar gained Friday after US data showed a deceleration of US job losses leading many Forex traders and investors to speculate that the world’s largest economy is starting to recover. Usually the dollar declines after positive data as risk sentiment rises but this time the dollar’s reaction to positive economic data is starting to change. Since the recession began negative economic data has caused Forex traders and investors to seek the safe haven of the US dollar.

Dollar Returning to Fundamentals

Data from the US Labor Department showed better than expected results and US employers cut approximately 247,000 jobs in July. Other US data from the housing and manufacturing industries showed improvement raising hopes the US economy will perform better than most developed nations. Joseph Trevisani of FX Solutions stated, “This a sign that the currency markets are weaning themselves from ‘the good news is bad news’ for the dollar syndrome and returning to fundamental measures of economic growth and interest rate cycles.”

US Emerging From Recession

The US unemployment rate fell from 9.5% to 9.4% the first decrease in the unemployment rate since April 2008. Many forex traders and economic experts see the data coming from the US as a sign that the American economy is quickly emerging from the global recession. Greg Salvaggio of Tempus Consulting said, “We’ve seen improvement in housing, in manufacturing output and now clearly in the job environment. Add this up and it will eventually lead to dollar gains as we think the U.S. economy will emerge more quickly from recession,” he added. “This could be the start of the unwinding of the inverse stocks-dollar correlation.”

Busy Calendar This Week

A surprising move by the Bank of England to engage in more quantitative easing affected the pound and forex traders and forex investors will be watching Tuesday’s upcoming Federal Reserve meeting closely. The upcoming week will be busy with the Fed meeting, June’s international trade data due on Wednesday, retail sales for July on Thursday and industrial production and consumer sentiment on Friday.