Risk Appetite Pressures Dollar

The US dollar fell to a 14 month low against a basket of major currencies on Thursday. (Oct. 8, 2009) as rising stocks prompted an increase in risk appetite. The Aussie dollar rose due to strong employment data and the euro rose to a two week high of $1.48. Soft demand for 30 year treasuries put more downward pressure on the greenback. Investors have watched US debt auctions closely this year and many are concerned with massive US deficits.

Stocks Up

US stocks rose as Alcoa Inc posted unexpected profits and retailers reported positive monthly sales and US unemployment claims hit a nine month low last week adding to recovery hopes. Fabian Eliasson of Mizuho Corporate Bank stated, “It’s just a continuous recovery play, We’re seeing good numbers all over the place.” The ICE Futures U.S. dollar index which measures the US dollar against six major currencies fell to 75.767, the lowest since August 2008. The DXY was last down 0.9% at 75.775 .DXY.

Aussie Dollar Wins Again

The dollar vs. yen was down 0.2% at 88.41 yen. Currency analysts said that some Asian central banks including those from emerging economies were buying dollars in an attempt to slow the dollar’s slide. The Aussie dollar rose 1.8% on better than expected Australian jobs data and the Aussie dollar rose to a 14 month high.

Trichet’s  Statement Helps Euro

The euro was up 0.6% after European Central Bank president Jean-Claude Trichet said that US support for a strong dollar policy was very important. Matthew Strauss of RBC Capital Markets said, “It was actually what he didn’t say that caused the market to buy the euro. Before Trichet’s briefing, there was chatter in the market that he may give more forceful comments on having a ’strong’ dollar. But Trichet just gave the standard language so we saw some relief rally for the euro.” Trichet also said that the Euro Zone economy is stabilizing and will recover gradually. He also warned that a recovery will not be fast and said that interest rates are appropriate for the current economic climate.

Thursday was the first anniversary of the central banks coordinated effort to cut rates to bolster confidence after the collapse of Lehman Brothers.

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.

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.

Euro Gains For Fourth Straight Session

The euro rose against the dollar for the fourth straight session causing a significant change in the euro to dollar exchange rate. Improved German investor sentiment prompted many to believe that the worst of the recession in Europe is over. A stock rally improved investor sentiment and also affected the euro to dollar rate. Worries about the health of the US auto industry also put pressure on the dollar.

UK Economy Contracts

The dollar is widely seen as a safe haven by forex investors when economic news is bad and increased risk appetite traditionally puts pressure on the US dollar. On Friday the euro to dollar rate rose 0.7% to $1.3245 after rising as high as $1.33. The euro to pound rate stands at 91 pence, a two week high. Data showing that the UK’s economy posted its largest contraction in 30 years put pressure on the Pound. On Friday the pound to dollar exchange rate was at $1.4661, a decline of 0.4%.

Economic Decline Slowing

The euro to dollar rate declined slightly after the US Federal Reserve announced that US banks must hold substantial amounts of capital beyond those required by regulation. Some economists believe that stocks could decline in the days ahead if any banking troubles surface. Finance leaders from the G7 group of nations stated that economic decline was slowing helping to bolster the euro to dollar rate.

Busy Week Ahead

In coming weeks the euro to dollar rate is expected to be affected by the slew of economic data coming from Europe and the US. Earlier in the week the ZEW report from Germany had a positive effect on the euro to dollar exchange rate. While many see the worst of the recession declining, this week’s performance by stock markets could be an indicator of things to come in forex markets.

The US dollar rose against the Japanese Yen on safe haven demand and remarks by Federal Reserve Chairman Ben Bernanke. Forex traders sought the safe haven of the dollar due to concerns about the US banking system. Forex traders also paid heed to Bernanke’s remarks to the US congress calling for resolute action by the government to pull the US out of the ongoing recession. Many Forex traders and investors are betting that the US will be the first nation to recover economically from the recession.

Dan Cook of IG Markets in Chicago stated, “The dollar is in great demand because of high risk aversion. There is still a lot of market uncertainty, a lot of volatility in the stock market. And the more uncertain it is, the better it is for the dollar.” Forex traders were concerned about insurance giant AIG posting the biggest quarterly losses in US history. The government recently gave AIG an additional $30 billion dollars and AIG was the recipient of earlier bailouts.

The US dollar rose to 98.24 against the Japanese Yen in late trading, The Euro was down and was trading at $1.2571. Equity markets rose earlier on Wednesday but fell due to dismal data from the US housing sector and a bleak outlook for the banking sector. The stick market was also concerned that Treasury Secretary Timothy Geithner failed to provide exact figures on how much it will cost the government to stabilize financial institutions. All of these factors sent Forex traders to safe haven currencies.

Forex traders and forex markets are also waiting for details of the ‘bad bank’ plan which would provide details on how banks would shed toxic assets. Melvin Harris of Advanced Currency Markets in New York stated, “People are awaiting this ‘Bad Bank’ plan. They’re looking for details … and how banks can start over. Once that happens, we’re going to see a complete reversal in dollar strength.”

Forex traders expect the European Central Bank to cut rates to a historic low of 1.5%. The Euro was pressured by concerns about struggling Eastern European economies. The only bright spot seemed to be the Aussie dollar which rose 1.5% against the US dollar.

This week promises to be a very volatile one on currency markets and Forex traders are expected to have one of the busiest weeks ever.

Citigroup Cause For Concern

Since Friday the US dollar has fallen amid concerns that the US may nationalize banks. Forex traders have been watching the Citigroup situation closely and are concerned that the US government may own large stakes in US banks. The dollar fell after an article in the Wall Street Journal said that the US government may own as much as 40% of the troubled bank.

Dollar Favored Safe Haven

Last week the dollar was at a three month high against the Euro and a six week high against the Japanese Yen. Although Forex traders traditionally see the dollar as a safe haven in times of trouble banking concerns sent forex traders seeking opportunity elsewhere. Tohru Sasaki of JP Morgan stated, “The dollar is continuing lower from Friday, although it should have been favored as a safe haven.”

Dollar Declines Against Yen, Euro, and Pound

On Monday forex traders saw the dollar continue to decline and the dollar fell 0.1% against the Yen. The troubled Euro rose 0.4% against the dollar and the British Pound rose 0.5% against the dollar. Forex traders believe the Euro was helped by plans by the Euro Zone to help the weakest members in Eastern Europe.

Bank Nationalization Negative For Dollar

During the global financial crisis the dollar has benefited by its status as a safe haven currency. The Euro Zone has been seen as behind the curve in addressing the financial crisis. Forex traders and experts see US bank nationalization as negative for the US dollar because it will increase the liabilities of the Federal Reserve Bank and will saddle US taxpayers with massive debt.

Forex traders have been watching the actions of the newly elected Obama administration closely. Changing conditions present Forex traders with new opportunities. Lately there has been a tsunami of bad news from around the globe and the volatility of currency markets has made forex trading tricky at best.

Hope For US Congressional Action

As any Forex trader knows, the US dollar and the Japanese Yen are often a barometer of investor’s risk appetite or risk aversion. Stock markets rose on Friday amid hopes that the US congress would take action to implement the Obama administration’s stimulus and bank rescue plans. Forex traders saw a slight fall in both the Dollar and the Yen. The dollar fell against the Euro and investors and Forex traders sought out higher yielding currencies.

Geithner Attends G7 Conference

Forex traders will be watching this weekend’s G7 meeting in Rome. Newly appointed Treasury Secretary Timothy Geithner will make his debut as a US representative at the global conference. The meeting will include finance ministers, and representatives from the World Bank, the International Monetary Fund, and the World Trade Organization. Obviously the conference will address the deepening global recession and currencies are expected to be a topic of discussion.

Forex Traders Seek Higher Yielding Currencies

In Australia a last minute deal pushed a stimulus package through Parliament and the Aussie dollar rose 1% against the US dollar. A slight return of risk appetite had Forex traders dumping the dollar and yen in favor of higher yielding currencies including the emerging Brazilian Real.

Deepening Recession in Euro Zone

The news coming out of the Euro Zone continues to indicate a deepening recession and is expected to cancel out short term gains made by the Euro. Data showed that German GDP shrank by 2.1 % during the last three months of 2008, the largest drop since reunification in 1990. Data also showed France’s economy declined at its fastest pace in 34 years. The British Pound which benefited by the slight return to risk appetite rose 1.32% against the US dollar to $1.4449.

US Credit Rating ‘Tested’ By Economic Crisis

On Thursday the credit rating agency Moody’s Investor Services said that the triple A ratings of both the United States and Great Britain are “being tested” by the global economic crisis. Monday’s trading is expected to be slow as US markets close for President’s Day. Forex traders will be paying close attention to the ongoing G7 conference which lasts until Sunday.

Swift Return To Risk Aversion

Equity markets remain unimpressed by the Obama administration’s stimulus and bank rescue plans. The return to risk aversion has been swift and Forex traders are seeking the safety of the US dollar and the Japanese Yen. Tuesday’s remarks by Treasury Secretary Geithner were seen as lacking detail and many Forex traders say the plan offers nothing new. Many analysts see Geithner’s and Bernanke’s plans as just more of the same offered by the previous Bush administration.

Markets Tense

Earlier in the week a short lived return to risk appetite had many Forex traders and investors dumping the dollar and the yen in favor of higher yielding currencies like the Aussie and New Zealand dollars. Despite figures that show a rebound in retail sales and lower than expected unemployment figures markets remained tense.

Lack of Confidence

Markets failed to respond to the positive figures which show a lack of confidence in the Obama administration’s bailout plans and policies. Nick Bennenbroek of Wells Fargo stated, “The dollar is getting support from a lack of belief in any good piece of economic data and lack of belief that efforts by the U.S. administration will pay dividends.”

Dollar and Yen Safe Havens

The Euro fell to $1.2728 against the dollar and the dollar fell to 90.35 against the Yen. Traditionally both the dollar and yen benefit from market volatility and risk aversion. While both are relatively low yielding currencies forex traders use them as safe havens in times of economic trouble. Both risk appetite and risk aversion are fueled by economic news and government economic policies and investor sentiment.

Economic Recovery A Long Way Off

Forex traders and investors now realize that the global economy will take longer to recover than was once thought. The US congress reached an agreement on the proposed $789 billion bailout package consisting of emergency spending and tax cuts. Voting on the package could take place as early as Thursday Feb. 19th.

Forex trading has been difficult in these tumultuous times and currency markets are constantly shifting. Once the US bailout package is approved hopefully markets will respond positively.

Pound Pummeled

As any Forex trader knows, the British Pound has taken a pounding on world currency markets. The bad news just keeps on coming with no end in sight. On Monday the Pound took another drubbing as the news came out that Moody’s Investor Service had downgraded the credit rating of the venerable Barclay’s Bank in the UK.

Troubled UK Banking Sector

Forex traders and investors quickly shed the Pound as UK banking fears wiped out last week’s gains. Last week the Pound posted its biggest percentage gains against the US dollar in 20 years. Dustin Reid of RBS Global Banking and Markets said that concerns about the UK banking industry may prompt the “Bank of England to cut interest rates by more than expected.”

BOE to Cut Rates

Most Forex traders expect the bank to cut rates to a historic low of 1.0% on Thursday down from 1.5%. The Pound fell to $1.4203% after reaching a low of $1.4053, below last weeks high of $1.4527. The Euro rose 2.6% against the Pound trading at 90.34 pence. This reversed last weeks trend where the Pound had its second best week in 10 years while the Euro suffered record losses.

The Pound’s decline started on Monday after Moody’s cut Barclay’s credit rating causing shares of Barclays to fall 11%. The news caused Forex traders to dump the Pound in favor of higher performing currencies. David Powell, Bank of America currency strategist had this to say, “The outlook for sterling remains one of weakness. The data was not any worse than expected but the overall tone was still negative for the currency.”

UK Rates Lower Than Euro Zone

At present UK rates are 50 basis points lower than in the Euro Zone and the expected rate drop could push the Pound even lower due to a growing rate differential. Forex traders will be watching the moves made by the ECB and the BOE closely and will also be watching the US employment report. Forex trading has become somewhat of a fine art lately and Forex traders must absorb massive amounts of global data. Once again its going to be a very busy week!

World Economic Forum in Davos Switzerland

The annual World Economic Forum now taking place in Davos Switzerland has attracted the attention of Forex traders from around the globe. On their website the World Economic Forum states that their purpose is, “an independent international organization committed to improving the state of the world by engaging leaders in partnerships to shape global, regional and industry agendas.”

Forum to Address Crisis

Because of the global financial crisis this year’

s meeting will be of particular interest to Forex traders and investors. Forex trading has been tumultuous during the crisis and Forex traders search through reams of data and statistics to glean useful information that will help them make successful trades.

Dollar’s Role as Reserve Currency Criticized

The US dollar continues to be the world’s reserve currency accounting for 63.9% of official foreign exchange reserves as opposed to 25.5% for the troubled Euro and 4.7% for the British Pound. This has raised the ire of Russia’

s Vladimir Putin who believes that it is dangerous for the world to excessively rely on the US dollar as the only reserve currency. In a statement which should have Forex traders taking notice Mr. Putin said, “Excessive dependence on what is essentially the only reserve currency is dangerous for the world economy, therefore it would be expedient to encourage an objective process for the emergence of several strong regional currencies in the future.”

Concerns About US Stimulus Program

At last year’s forum Bill Gates, Warren Buffett and George Soros predicted a collapse of the US dollar that did not materialize. At present the US dollar is being propped up by the perception that it is a safe haven currency. There was concern about the ‘buy American’ provisions in the Obama administration’

s multi billion dollar stimulus plan. Peter Allgeier, acting U.S. trade representative, assured forum attendees that the Obama administration understands concerns that the proposal could spark a trade war which would prolong the recession.

Gathering of Business Elite

Forex traders and investors will be watching the annual forum very closely. The annual forum draws a collection of the wealthiest business leaders and government officials from around the world. The discussions have profound effects on global markets and wise Forex traders will be paying close attention.