Dollar’s Low Yields Prompts Selling

After a three day display of relative strength the US dollar fell Tuesday and is now hovering near a one year low against a basket of major currencies. The dollar’s low yields prompted forex traders and investors to sell the greenback in advance of the FOMC meeting and the up coming G 20 summit in Pittsburgh. It is widely believed that the Fed will keep rates at historic lows.

Kiwi Dollar a Winner Again

Once again the Kiwi dollar rose, this time to a 13 month high against the US dollar. The Kiwi rose over a cent to $0.7315, the highest since August 2008. New Zealand GDP unexpectedly rose during the second quarter signaling an end to a prolonged recession. The rise in the Kiwi sent investors in search of other higher yielding currencies and the Aussie dollar is another big winner in advance of the Fed meeting. Although economic data showed the Euro Zone service sector grew for the first time in 16 months and manufacturing output grew for the second straight month the data had little effect on the euro in forex markets.

G 20 Ahead

Investors remain cautious in advance of the Fed statement and the G 20 conference and some experts expect both events to adversely affect stock markets. Ian Stannard of BNP Paribas stated, “Overall the FOMC and the G20 are unlikely to disrupt the recent positive tone in asset markets and that’s likely to see the trends in currency markets resume. I will be looking at the currency pullback I expect today to be very much providing a buying opportunity for the pro-cyclical and commodity currencies.”

DXY Down

The dollar index or DXY was down at 76.046. The dollar index has declined 2.5% this month as investors sold the dollar in favor of higher yielding assets spurred by confidence in global economic recovery and the belief that the Fed will continues to keep rates low. The downward trend for the US dollar is expected to continue in advance of the G 20 summit.

Dollar Gains on Euro

The US dollar gained on Monday and pulled back from a one year low against the euro. The dollar rose almost 1% against the Japanese yen in light Asian trading. Many Asian financial centers were closed for holidays. An absence of economic data caused investors to take profits on currencies that have gained against the dollar including the euro which as gained 2% this month. Forex traders and investors increased short dollar positions last week to their highest since March 2008 betting that the greenback would depreciate.

Pound at Five Month Low

Against a basket of major currencies the DXY rose 0.6% to 76.872 after hitting a one year low of 76.01 last week. The pound vs. euro hit a five month low after the Bank of England said that the pound’s long-run sustainable exchange rate has decreased because of economic imbalances in the UK. The euro to pound exchange rate rose 0.2% to 90.79 pence. The pound vs. dollar rate was down 0.6% to $1.6175.

FOMC Meets This Week

Forex investors are watching the Fed meeting this week for signs of changes in monetary policy. Many currency analysts believe that any positive data about the US economy from the Fed would bolster the dollar further on forex markets. Last week Federal Reserve Chairman Ben Bernanke said that it is “very likely” that the recession is over but cautioned that recovery would be slow. In recent months better than expected US economic data has prompted speculation that the Fed may raise rated from zero but many analysts believe that more time is required before the Fed raises rates.

Obama Wants Global Economy Reshaped

Some experts believe that dollar selling would increase if the Federal Reserve indicates that rates will remain at their present levels. In a research note Analysts at BTM UFJ said, “A clear message that policy is on hold is likely (on Wednesday), which will certainly temper dollar buying on the back of any changes to the quantitative easing timetable.” Forex markets are also awaiting the upcoming G 20 summit in Pittsburgh later this week. Although currencies are not expected to be formally discusses U.S. President Barack Obama has said he will push the G 20 leaders for a reshaping of the global economy.

Rising Optimism

The US dollar hit new one year lows against the euro and other major currencies. Rising stocks and optimism about economic recovery pared safe haven demand and put downward pressure on the dollar. Increased industrial production and an increase in mergers and acquisitions cause Wall Street to rally further eroding demand for the dollar.

Link Between Wall Street and Risk Sentiment

Forex traders have sold the dollar heavily as safe haven demand diminishes amid signs of global recovery from the current recession. Investor concerns about the massive US deficit put even more pressure on the dollar and fueled a selloff of the dollar. Ronald Simpson of Action Economics stated, “There’s still this persistent link between Wall Street and risk. With stocks going up, it continues to be very difficult for the dollar to rally.”

Euro, Yen Up

In the very recent past many forex traders believed that the link between Wall Street and risk was faltering but recent events have proved their assessment premature. The euro to dollar exchange rate rose 0.3% to $1.4711 a year high for the euro. The yen to dollar exchange rate fell 0.2% to 90.85 yen. The U.S. dollar index .DXY which tracks the dollar’s performance against a basket of currencies fell to 76.151 the lowest in nearly a year.

Investors Sell US Assets

Treasury data that showed that overseas investors sold US assets for the fourth straight month put further downward pressure on the beleaguered dollar. Omer Esiner of Travelex Global Business Payments stated, “The headline number certainly paints a bit of a dark picture with regard to overall demand for U.S. assets, but I think the silver lining of this number is that we still see healthy demand from foreign central banks for U.S. Treasuries.”

Aussie and Kiwi Dollars Gain

High yielding currencies such as the Australian and New Zealand dollars have benefited from a weak dollar. The Aussie dollar rose 1.3 to 1.3 and the New Zealand dollar rose 1.4% to $0.7139.