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.