Euro Gains on Positive Data

_The euro made gains on the US dollar as better than expected economic data from the Eurozone showed that growth returned to the two largest European economies, Germany and France. The dollar was also pressured by demand for higher yielding assets. The results of the FOMC meeting showed that the recession in the US may be nearing its end sparking demand for high yielding currencies such as the Aussie and Kiwi dollars. As many experts expected the Fed will keep rates near zero in an attempt to spur recovery.

Eurozone to Return to Growth in

2010

In its monthly bulletin the European Central bank said that the Eurozone economy would return to growth in 2010. The euro/dollar exchange rate was up 0.5% to $1.4270 and the euro rose 0.8% against the yen to 137.49. Many currency strategists believe further euro gains are unlikely for now.  Adam Cole of RBC Capital Markets in London stated, “What we really need to see for the euro to run any further is some evidence from leading indicators that growth is actually turning positive at the moment. So there is a limit to how far it can run until we get some convincing evidence that Q3 is likely to be positive.”

Aussie and Kiwi Dollars Gain

Both the Aussie and Kiwi dollars rebounded from recent losses and the Aussie dollar rose 1.2% to $0.8419 while the Kiwi gained 0.9% and traded at $0.6761. While risk sentiment has improved some remained cautious about the Fed’s decision to extend asset purchases and believe the action shows that the US economy is still vulnerable. Many forex traders and investors are awaiting U.S. retail sales data. Stuart Bennett of Calyon in London said, “If the market decides to buy the USD on the back of the more upbeat headline, we could see a similar USD rally as after last Friday’s employment report.”

Fed Won’t Raise Rates Until 2010

A survey taken by Reuters showed that a majority of dealers expect the US recession to end this quarter and do not expect the Fed to raise rates until 2010.

Dollar Rally Continues

The US dollar held on to Friday’s rally in Monday’s trading session. Forex traders and investors are waiting for the results of the Federal Reserve meeting which began Tuesday. The euro fell slightly against the dollar from 1.4193 to 1.4135. The dollar slipped slightly against the yen from 97.51 to 97.17.  Better than expected US employment figures are responsible for the dollar’s rally last Friday.

Dollar’s Rally Unusual

Many Forex traders and currency experts found Friday’s dollar rally unusual due to the fact that the dollar has been largely bolstered by its ‘safe haven’ status. During the current recession the dollar usually gains on bad economic news and is pressured downward when risk sentiment rises. Terri Belkas of  Forex Capital Markets state, “This coming week of price action in response to the Federal Reserve’s rate decision and US retail sales will be important as a gauge of what will drive the US dollar going forward: economic data or risk appetite.”

Correlation Between Dollar and Risk Sentiment Fades

Many other experts are also seeing the correlation between the dollar and risk sentiment fade. Referring to market reaction to Friday’s US employment figures Lee Hardman of Tokyo-Mitsubishi UFJ said that the data was, “the clearest signal yet that the negative correlation between improving risk sentiment and a weaker dollar is beginning to break down. The positive reaction of the dollar to stronger US economic activity is a function of increasing Fed tightening expectations.” Commerzbank currency analyst Ulrich Leuchtmann stated, “We see this as a first sign that the old trading pattern ‘good US data equals weak dollar’ has been clearly eroded and that investors can no longer unilaterally interpret good news from the US negatively for the dollar.”

FOMC Statement Due Wednesday

At present most Forex traders and investors are keeping a close eye on the Federal Open Market Committee. The decisions of the central bank could spark volatility in Forex markets. Most experts believe that the Fed will maintain extraordinary measures to stimulate growth until the recession shows sure signs of recovery.

Dollar Gains on Positive US Data

The US dollar gained Friday after US data showed a deceleration of US job losses leading many Forex traders and investors to speculate that the world’s largest economy is starting to recover. Usually the dollar declines after positive data as risk sentiment rises but this time the dollar’s reaction to positive economic data is starting to change. Since the recession began negative economic data has caused Forex traders and investors to seek the safe haven of the US dollar.

Dollar Returning to Fundamentals

Data from the US Labor Department showed better than expected results and US employers cut approximately 247,000 jobs in July. Other US data from the housing and manufacturing industries showed improvement raising hopes the US economy will perform better than most developed nations. Joseph Trevisani of FX Solutions stated, “This a sign that the currency markets are weaning themselves from ‘the good news is bad news’ for the dollar syndrome and returning to fundamental measures of economic growth and interest rate cycles.”

US Emerging From Recession

The US unemployment rate fell from 9.5% to 9.4% the first decrease in the unemployment rate since April 2008. Many forex traders and economic experts see the data coming from the US as a sign that the American economy is quickly emerging from the global recession. Greg Salvaggio of Tempus Consulting said, “We’ve seen improvement in housing, in manufacturing output and now clearly in the job environment. Add this up and it will eventually lead to dollar gains as we think the U.S. economy will emerge more quickly from recession,” he added. “This could be the start of the unwinding of the inverse stocks-dollar correlation.”

Busy Calendar This Week

A surprising move by the Bank of England to engage in more quantitative easing affected the pound and forex traders and forex investors will be watching Tuesday’s upcoming Federal Reserve meeting closely. The upcoming week will be busy with the Fed meeting, June’s international trade data due on Wednesday, retail sales for July on Thursday and industrial production and consumer sentiment on Friday.

Dollar Gains on Risk Aversion

The US dollar gained on Friday as US corporate earnings showed mixed results prompting a slight return to risk aversion. Corporate giant General Electric reported that second quarter profits fell by almost 50% while Citigroup posted smaller than expected losses. Earlier in the week Goldman Sachs, Intel, and JP Morgan posted stellar earnings but investors remained concerned about the health of the economy which affected currency exchange rates. Steven Butler of Scotia Capital stated, “There’s reason for optimism, but it seems we need to see a grand slam for people to get carried away. This underlines that the market is still skeptical and afraid to get overextended.”

Euro Fails to Hold Gains

The euro which had traded at $1.41 earlier in the week failed to hold on to earlier gains reflecting uneasiness among investors. The euro has fallen 0.5% to $1.4075 against the dollar and fell 0.5% against the yen trading at 132.10. The pound also fell against the dollar losing 0.9 % and traded at $1.6285. Many forex traders and investors felt that markets had no clear direction last week making trading difficult. Last week’s bombings in Jakarta Indonesia sent short lived shockwaves through global forex markets. Melvin Harris of Advanced Currency Markets said, “There’s still an underlying tone of risk aversion looming. People don’t feel comfortable with the economy.”

Dollar Pares Losses

The US dollar ended last week by recovering losses suffered earlier in the week after earnings posted by Goldman Sachs and Intel lifted risk sentiment prompting investors to seek higher yielding currencies and assets. Markets ignored euro zone trade data that showed a 1.9 billion euro surplus and comments by Japan’s top financial diplomat who said the US dollar would remain a core asset of Japan’s foreign currency reserves.

Next Weeks Economic Calendar

Next week’s economic calendar includes June’s leading economic indicators which are due Monday. On Wednesday the weekly report on U.S. petroleum supplies is due and on Thursday weekly jobless claims and the report on June’s existing home sales are due.

Risk Appetite Pressures Dollar

The US dollar fell to a one month low against a basket of major currencies as positive data from Goldman Sachs and Intel bolstered forex investor and trader optimism about the direction of the economy. Other data showed that some factories in New York State showed signs of recovery lifted risk sentiment and put downward pressure on the greenback. Brian Dolan of Forex.com stated, “Intel’s earnings got things kicked off yesterday, and the U.S. data just improves the outlook, so all lights are flashing green for investors to take on risk.”

Investors Bet on Corporate Earnings

Currency experts said that investors are betting that other US corporations will post solid second quarter earnings. Steve Barrow of Standard Bank in London said, “The market may be expecting more pleasant surprises rather than unpleasant surprises from earnings.” This week results are expected from approximately 30 US corporations. JPMorgan Chase & Co will post results on Thursday and Citigroup Inc and Bank of America Corp will post earnings on Friday.

Euro Trades at $1.41

One indication of revived risk appetite was data from Bank of New York-Mellon which showed that the euro was the most bought currency on Wednesday. The euro had been pressured by recent risk aversion. The euro was up 1% on Wednesday at $1.4104. Some traders believe that euro bond redemptions may limit gains for the euro. 60 billion euros worth of bond redemptions are due this week with 36 billion euros due Wednesday. Antje Praefke of Commerzbank in Frankfurt stated, “If funds from those redemptions go back into euro assets, it won’t be an issue, but if for example some of it goes back to Japan, euro-yen may fall.”

Canadian Dollar Up Against US Dollar

The Canadian dollar reached a one month high against the US dollar. The Loonie rose 1% against the US dollar for a one month high of C$1.1185. The commodity based Australian dollar also rose 1% against the greenback. Many currency experts expect volatile forex trading for the rest of the week.

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.”