Evidence of US Recovery

The greenback is now at a three month high against the euro and other major currencies. The Fed’s positive economic assessment and evidence that the US economy is starting to recover pushed the dollar higher in currency markets. The Fed also said that deterioration in the labor market is “abating,” and reported an increase in household spending. Ronald Leven of Morgan Stanley stated, “There’s a growing consensus that the dollar will do well as we go into the New Year. We’re seeing ongoing interest to build up long-dollar positions.” Most currency experts believe the dollar will extend recent gains on improving economic data.

Fed to Withdraw Emergency Measures

The Fed has indicated it will withdraw emergency measures when they expire in February 2010 prompting some to speculate that the Fed may raise rates sooner than expected. Nick Bennenbroek of Wells Fargo said, “We see the U.S. economy continuing to recover and monetary policy settings starting to move back to normal. Although our economics team does not expect actual rate tightening to take place until late in 2010, the withdrawal of non-conventional measures could start tipping the scales in the dollar’s favor.” The dollar has also benefited from year end profit taking on assets such as stocks, commodities and emerging currencies. The ICE futures’ dollar index .DXY is up 1.9% on the week, the best performance since April.

Lingering Greek Debt Concerns

The troubled euro fell 2.4% on the week against the greenback its worst performance in eight months. Persistent Greek fiscal problems have pressured the euro. Both Fitch’s and Standard and Poor’s have downgraded Greece’s sovereign debt rating and the announcement of spending cuts by the Greek Prime Minister have done little to ease concerns. Todd Elmer of CitiFX in New York said, “The euro is feeling the ill-effects of ongoing strains in Greece and we doubt that this euro-negative factor will soon abate.” This week the US will release its third quarter GDP figures and investors are sure to be watching. Most economists expect the data to be positive.