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.

Markets Nervous

The yen vs. euro rate hit a two week high on Friday and the dollar rose for the second straight session as investors trimmed exposure to risk. Falling stocks in the US and Europe sent traders and investors in search of safe haven assets. The yen and the greenback rose against other major currencies prompted by a return of risk aversion. Sebastien Galy of BNP Paribas SA said, “The market is very nervous, and there are not a lot of risk takers right now “The market is very nervous, and there are not a lot of risk takers right now. There’s one big trade, the dollar short trade, and people are feeling increasingly nervous about it.”

Falling Commodities Pressure Loonie

The Canadian dollar, also known as the ‘loonie’ fell on Friday as falling equity and commodity prices pressured the currency. A drop in gold and oil prices pressured the commodity linked loonie. Falling commodity prices also pressured other commodity based currencies including the Aussie and Kiwi dollars which had been recent big winners in currency markets. Bank of Canada Governor Mark Carney said that the Canadian economy posted worse than expected third quarter results and that the Canadian economy risks more setbacks due to recent gains of the Canadian dollar. Matthew Strauss of RBC Capital Markets stated, “We are very much caught up in the broader theme of risk aversion that has gained further momentum overnight. On the back of that we saw equities selling off, commodities selling off and then on the flipside the U.S. dollar rallying. There is no surprise that the Canadian dollar struggled overnight versus the U.S. dollar.”

Investors Concerned About UK Banking Sector

The pound declined against the US dollar, euro and the yen on investor concerns about massive UK deficits and concerns about the health of the UK banking sector. The pound fell a full 1% trading at $1.6509 on Friday. Against the euro the pound fell 0.6% to 90.07 pence and fell 1.1% against the yen to 146.74. Divisions in the Bank of England Monetary Policy Committee have also been a source of investor concern.

Congress Attempts to Stimulate the Economy

Earlier in the year the US government sent out ‘stimulus’

checks to every taxpayer. The idea behind the move was that if consumers had extra funds available they would purchase goods and services. Unfortunately the move did little to stimulate the US economy. The US has lost approximately 170,000 jobs so far this year and the future looks anything but bright. US auto makers are in serious trouble and many plants are scheduled to close with job losses in the thousands. Consumers are uneasy about the future and instead of spending their stimulus checks as intended most chose to save it for the future or use the money to pay bills.

First Stimulus Package Ineffective

Despite the ineffectiveness of the stimulus checks Ben Bernanke the chairman of the Federal Reserve and congressional Democrats are proposing another round of stimulus checks. Earlier in the year congress sent out about $100 billion dollars in stimulus checks. Since then consumer confidence has evaporated and retail sales have fallen significantly in the last three months. Bernanke feels that the earlier $700 billion dollar bailout is starting to work but the effects will take months to be felt. Bernanke told congress that there is a likelihood of an extended economic slowdown and a second round of stimulus checks would help to get the consumer economy back on track. Fears of a US recession has fx traders around the globe uneasy and many predict a decline in the US dollar.

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A Lack of Confidence Despite Bailout

Even though the US congress passed a $700 billion dollar bailout package last week many Americans lack confidence in the current economy and are uncertain about the future. This uncertainty has affected consumer spending with many putting off major purchases and spending less on consumer goods and services.

The Credit Crunch and the US Economy

Credit is a major part of the US economy and with the current credit crunch many Americans are finding credit much harder to come by. Due to the subprime mortgage mess banks have tightened lending requirements putting access to credit out of the reach of many Americans. Since consumer spending is one of the leading economic indicators a reduction in retail sales could have serious ramifications for the economy across the board. Despite the passage of the bailout bill and the rally of the US dollar on forex markets many Americans find themselves faced with hard economic decisions to make.

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