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.

Dollar Rebounds

The US dollar rebounded from a week of volatile trading on Friday and the euro to dollar exchange rate fell after data showed a record drop in Euro Zone industrial production. The dollar was also helped by remarks by the Russian finance minister who said that the US dollar’s role as the world’s reserve currency is secure for the near future. Earlier in the year there had been calls by Russian politicians for a different shared reserve currency.

Euro Falls Against Dollar and Yen

The euro was weakened by dismal economic data and fell against the US dollar and the Japanese yen after a newspaper report said that tougher credit terms are hurting German businesses. Brian Kim of UBS AG stated, “Euro zone industrial output disappointed already weak expectations. The data will add to calls for a prompt start to the ECB’s proposed covered bond purchasing scheme and the euro weakened on the news.”

Dollar to Remain Reserve Currency

A statement by Russian Finance Minister Alexei Kudrin helped the greenback and affected currency exchange rates. Kudrin said the US dollar was in “good shape” and added that at present there is no substitute for the dollar as a reserve currency. Kudrin made the statement just days after his superior President Dimitry Medvedev along with Chinese central bank Governor Zhou Xiaochuan suggested the need for an alternative reserve currency. Michael Woolfolk of Bank of New York Mellon stated, “At this point there’s no alternative to the U.S. dollar in terms of deep liquid markets and trading 24-7 globally. Nothing even comes close to the dollar in terms of reserve status.”

Investors Betting US Will Recover First

On Friday the dollar rose against all 16 major currencies except the yen and the euro to dollar rate fell to $1.3854 after hitting a recent high of $1.41. The dollar was also being bolstered by the belief of many forex investors and traders that the US will be the first to recover from the current global recession. Currency exchange rates were also affected by the statements of Japanese Finance Minister Kaoru Yosano who said, that the Japanese government has, “complete trust in the fact that the United States views its strong-dollar policy as fundamental. Our trust in Treasuries is absolutely unshakable.”

Volatile forex trading is expected this week but for now the dollar seems secure.

Euro Falls on Profit Taking

The euro to dollar rate fell as investors took profits on the Euro’s recent rise to $1.41 pushing the euro downward to $1.4003 a decline of 0.4%. Firas Askari of BMO Capital Markets stated, “These are rather violent markets without huge conviction, so when the euro got a bit heavy, people headed for the door.” Goldman Sachs Group advised investors to buy the euro as risk aversion fades and commodities rise and talk of possible alternative currencies put downward pressure on the dollar. In a note to clients the Goldman Sachs foreign-exchange research team wrote; “The dollar has appreciated recently on the back of higher risk aversion. We think this offers a good entry point to go long the euro against the U.S. dollar.”

IMF Says Euro Zone Recovery to be ‘Slow and Modest’

Rising growth expectations have triggered risk appetite and have affected global currency exchange rates. Goldman Sachs believes that higher commodity prices will lead to a weaker dollar. Despite bad news from the euro zone the dollar fell against the euro stalling last week’s dollar rally. On Monday the International Monetary Fund said that recovery in the euro zone would be ‘slow and modest.’ The IMF also dais European banks face $1.2 trillion in losses.

Russia to Cut Back Treasury Purchases

The US dollar was also pressured by Russia’s announcement that its central bank will cut back on purchases of US Treasuries and would purchase IMF-backed bonds instead. The Euro’s rise to above $1.41 triggered automatic sell orders and pushed the currency back down to $1.3982. Firas Askar of BMO Capital Markets stated, “These are rather violent markets without huge conviction, so when the euro got a bit heavy, people headed for the door.”

Investors Concerned About US Rates

The Aussie and Kiwi dollars were winners on Tuesday. The Aussie dollar rose 0.3 percent to 80.40 while the Kiwi dollar rose 0.4 percent to 62.95. In the last three months the Aussie and Kiwi dollars have gained 24% on the US dollar making them top performers in Forex markets. Investors remain concerned about whether the US will raise rates by the end of the year. Rising rates would be a sure indication that recovery is underway. Richard Grace of the Commonwealth Bank of Australia holds a pessimistic view, “The Federal Reserve is not going to be raising rates anytime soon. As U.S. two-year bond yields fall, the U.S. dollar will fall with them, and we’ll see Aussie, sterling and euro head higher.”

Declining Demand For the Dollar

The declining demand for safe haven investments has put heavy downward pressure on the US dollar. Newly released US housing data reinforced investor optimism that the worst of the global recession may be over. Early Tuesday the dollar made some gains but these were lost as the New York trading session opened. In April pending home sales in the US posted the biggest gains in 7 ½ years indicating that the US housing market is recovering.

Risk Appetite Affecting Commodity Prices

The rise in risk sentiment has affected global currency exchange rates and is also influencing commodity prices such as oil. Vassili Serebriakov of Wells Fargo Said, “The overall sentiment in the market remains dollar negative. This whole story about a financial market recovery and stabilization of the global economy has encouraged people to take on more risk and buy commodity currencies essentially against the U.S. dollar.” Commodity based currencies like the Aussie and Kiwi dollars have preformed well in recent forex trading sessions.

Current Rates

The euro to dollar hit a yearly high $1.4332 on Tuesday and last traded at $1.4320, a daily increase of 1.1%. The AUD/USD climbed to a high of $0.8232 and was trading at $0.8210. Rising risk appetite affected other currency exchange rates. The commodity based New Zealand dollar hit an eight month high of $0.6595.

Russia Wants New Reserve Currency

US Treasury Secretary Timothy Geithner’s remarks failed to assuage concerns about the dollar’s strength. The Chinese government, the largest holder of US debt, expressed concerns about rising deficits and the strength of the dollar. Currency exchange rates were also affected by remarks by Russian President Dmitry Medvedev that the world needs a larger variety of reserve currencies.

Some Say Dollar Downtrend Extreme

Some currency analysts are concerned by the speed and extent of the dollar’s recent decline and its affect on currency exchange rates. Brian Dolan of Forex.com stated, “More and more talk has been circulating that the current dollar downtrend is becoming extreme. While we still have no concrete technical indications of a reversal, we are becoming increasingly cautious on chasing the dollar lower and today’s modest new highs versus yesterday’s suggests the short dollar trade has become more crowded.”

Dollar at Five Month Low

The US dollar is at its lowest this year against major currencies including the euro. Rising stocks and data indication that a recovery is underway have caused a sell off of dollar denominated assets as investors seek higher yielding currencies. The dollar did recoup some losses after data revealed that US inflation rose more than had been predicted and manufacturing showed a slower rate of contraction. Shaun Osborne of TD Securities stated, “Generally, this is still a case of better-than-expected data not necessarily good for the U.S. dollar. We expect no rebound in sight for the dollar just yet.”

Commodity Based Currencies Big Winners

The euro to dollar exchange rate gained 0.2% and traded at $1.4178 it’s highest since December. The Pound to dollar rate rose to its highest in seven months and traded at $1.6436. Commodity based currencies such as the Aussie and Kiwi dollars were the big winners as investors sold dollars and bought commodities. Brian Dolan of Forex.com said, “This is a market that is in the process of selling the dollar against everything, buying commodities, and that should continue today.”

Dollar Gains on Yen

The dollar to yen rate gained 1.1% and the yen traded at 96.31. The yen is widely believed to be the safest forex currency and traditionally falls as risk appetite increases. Currency exchange rates were also affected by the news that General Motors had filed for bankruptcy. Washington has pledged an additional $30 billion to rescue GM fueling investor concerns about massive US deficits and how they will be financed.

Euro Zone Data Better Than Expected

Positive data from the Euro Zone also affected currency exchange rates. The Euro Zone PMI manufacturing index rose to its highest in seven months. The UK Manufacturing PMI was also higher than expected. Recent data showing that the recession is easing has weighed heavily on the dollar and most experts expect this trend to continue in the near future.

Rising Risk Appetite Pressures Dollar

The US dollar is at a five month low against most other major currencies as rising risk appetite and concerns about the US deficit pressure the dollar. Concerns about unprecedented US debt levels have added to the dollar’s woes. A report revealed that South Korea’s National Pension Service intends to reduce the amount of US government bonds and securities in its five year portfolio.

Investors Seek High Yielding Currencies

The euro to dollar exchange rate rose to $1.41 due to investors seeking higher yielding currencies and investments. The perception that the global economy is beginning to recover is also putting pressure on the dollar and affecting global currency exchange rates. Many currency experts believe that as the global economy improved the dollar will start reacting negatively to poor domestic economic data. Currently the US budget deficit is at $1.8 trillion.

Euro at Five Month High

The yen to dollar rate fell 1.7 percent to 95.25 yen and the euro was trading at $1.4137, a five month high vs. the dollar. The Aussie dollar posted a record10% gain monthly gain and traded at $0.8000. The US dollar also fell 2.1% against its Canadian counterpart to $1.0908. The DXY fell 1.5% its worst month since 1085. Jessica Hoversen of MF Global stated, “Money is flowing out of the dollar. There was a lot of institutional money sitting on the sidelines during the worst of the crisis that now is looking for (higher) yields.”

US Deficits Cause Concerns

The US dollar has traditionally been a safe haven in troubled times but deficit worries are undermining the appeal of the dollar as a safe bet. Last week’s auction of over $100 billion in US debt was well received but the final results will not be known until June. Rumors that the US may lose its triple A credit rating pressured the dollar in last week’s forex trading.

Investors are expected to continue to seek higher yielding currencies and this will affect currency exchange rates. Recent stock market rallies have heightened risk sentiment putting pressure on the dollar.

German Bank Concerns Pressure Euro

The euro which had achieved four month highs against the US dollar fell on Wednesday due to several factors. Media reports that stated that Germany’s financial regulator had said that toxic debt held by German banks could explode “like a grenade” put further pressure on the euro. The euro to dollar exchange rate fell 0.2% to $1.3982 after hitting a high of $1.4051 on May 22nd.

Regulator Says German Banks “Are more than able” to Deal with Toxic Debt

Jochen Sanio, president of the German regulator BaFin said that German banks have 200 billion euros ($280 billion USD) of toxic debt and that write offs could be as high as 816 billion euros. Sanio also said that Germany is “more than able” to deal with the toxic debt. Many forex traders expect a further decline in the euro to dollar rate and believe recent gains are not sustainable. The 14-day Relative Strength Index which measures the euro to dollar exchange rate hit 71.12 on Tuesday, the highest since March 23rd.

Higher US Consumer Sentiment

Higher US consumer sentiment affected currency exchange rates. The Conference Board’s index of U.S. consumer sentiment rose in May to 54.9 the highest since April 2003. A report from the Richmond Federal Reserve Bank indicated that manufacturing activity in the Mid Atlantic region rose for the first time in a year.

US Housing Data Suggests Slowdown

The dollar gained after US housing data suggested a slowdown in US housing markets, rising inventory of unsold homes and falling prices. The data could prompt a return to risk aversion for investors. Omer Esiner of Travelex Global Business Payments stated, “This is a mixed bag of data, more likely the dollar will probably firm on the fact that inventories are rising and prices are falling.” Many investors remain skeptical of the ‘green shoots’ theory which suggests that economic recovery is taking place and this skepticism is affecting currency exchange rates. Robert Blake of State Street Global Markets said, “It’s going to be a long, slow recovery and we will have more bad news to come.”

For the remainder of the week currency markets are expected to follow the lead of global stock markets.

Dollar Falls vs. Euro For Three Straight Trading Sessions

On Wednesday the US dollar fell against a basket of major currencies. The dollar has fallen against the euro in three straight trading sessions and the dollar fell against the Japanese for three out of the last four trading sessions. The dollar vs. yen exchange rate is now at a two month low.

FOMC Releases Minutes of Meeting

The Federal Open Market Committee (FOMC) released the minutes of its meeting that indicated that the Fed plans to increase purchases of mortgage and government securities. The Fed’s actions have affected global currency exchange rates and have put pressure on the dollar. Gains in the euro to dollar exchange rates were halted by a decline in Asian stocks which prompted risk aversion.

Geithner’s Remarks

The dollar has been falling since the beginning of the week and has displayed a downward trend since April. Recent rallies in equity markets have increased risk appetite putting pressure on the dollar. Currency exchange rates were also affected by remarks by US Treasury Secretary Timothy Geithner saying the economy was “starting to heal” due to government bailouts. A successful share offering by the Bank of America lifted risk sentiment and put further pressure on the dollar.

DXY Falls

The dollar index (DXY) which measures the performance of the dollar against a basket of six major currencies fell to 80.909, the lowest since January. The dollar has been put under further pressure as investors sell dollar-denominated assets and seek higher yielding and riskier investments. Michael Woolfolk of Bank of New York Mellon, stated, “Overall, this is still a green-shoots rally. It’s evident in crude oil above $60, it’s evident in stocks, and it’s to some extent being driven by animal spirits.”

Fed Lowers Forecast

The Federal Reserve lowered its economic growth forecast and predicted higher unemployment. Despite the Fed’s bearish view of the economy currency traders ignored the Fed’s pessimistic view and sought further asset purchases which has affected global currency exchange rates.

Yen Up vs. Euro and US Dollar

The yen to dollar exchange rate has hit a two month high and has also affected the euro to dollar rate as investors seek the safe haven offered by the dollar and yen. Falling stock markets triggered the flight to safety as investors dump riskier currencies. Falling Asian shares are supporting the return to the dollar and yen as investors bought back both currencies that had been used to fund investments in higher yielding currencies in previous trading sessions.

Risk Appetite Halted

Risk appetite has dominated currency markets in the past two weeks despite warnings from bankers and economists that a belief in recovery is premature and that stock rallies are not sustainable. The ‘green shoots of recovery’ theory has dominated forex markets in recent weeks and has affected global currency exchange rates. Reports due this week are expected to show that Japan’s economy has suffered its steepest quarterly decline since World War Two. The report will undoubtedly affect the dollar to yen exchange rate and could put pressure on the Yen.

Week to be Dominated by Equities

Risk aversion has also affected the euro to dollar rate and the euro is trading at $1.3498 on Monday’s midday trading. Many experts expect currency exchange rates to be mostly affected by stock markets during the coming week. Simon Derrick of Bank of New York Mellon Corp stated, “The broader trend is one of continued risk aversion. It’s less to do with a positive for the dollar than with people pulling away from the other markets.” Sue Trinh, currency strategist at RBC Capital Markets in Sydney, said “We’re in for another week dominated by equities and given the poor close of the U.S. market, there is caution about a sell-off in risk,”

ECB May Consider Unconventional Measures

Last week the euro to dollar exchange rate was hit hard after ECB council member Axel Weber warned against “exaggerating” recent data pointing to economic recovery. European Central Bank President Jean-Claude Trichet said over the weekend that the ECB would consider unconventional measures at its next meeting. Should the central bank adopt such measures it is expected to pressure the euro dollar exchange rate. This week most forex traders expect currency markets to follow the lead of global equity markets.