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.

G7 to Monitor Markets

Forex traders had been watching the G7 meeting held in Rome last weekend with great interest. All reports indicate that currencies were not discussed to any great length although the Chinese Yuan was mentioned. Forex traders learned that the group of central bankers and finance ministers will monitor foreign exchange markets and will take appropriate action. The statement was almost identical to one the group issued in October 2008.

Yen, Pound Discussed

Of interest to Forex traders is the news that European officials expressed concern over statements by the Japanese government that they would intervene in currency markets. There was also concern over the weakness of the British Pound which makes exporters in the Euro Zone to compete with their British competitors. They also noted that the volatility of the British Pound and the Japanese Yen had declined in recent weeks. Joaquin Almunia, European Economic Affairs Commissioner stated, “We see that volatility has increased…but taking into account the present levels of the different currencies we are now closer to normal values of those currencies than we were a few months ago.”

Possible Intervention

Of further interest to Forex traders was the news that the group warned against excessive market swings. A statement released by the group clearly stated, “Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We continue to monitor exchange rate markets closely, and cooperate as appropriate.”  While most of the group’s statements were in general terms many Forex traders and investors are concerned by government interventions into currency markets.

French Economy Minister Christine Lagarde said that the Bank of England should take appropriate action to address the weak pound but British finance minister Alistair Darling stated that, “Britain has a policy of targeting inflation, not the exchange rate.”

Stimulus Measures to Take Time

Forex traders took note of statements by the group that indicated that the recession will last through 2009 and any stimulus measures by governments would take time before they took effect. Forex trading has been a tricky business lately and as always education, patience, and discipline are the keys to success for Forex traders.

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.

Bernanke Testifies

On Tuesday Federal Reserve President Bernanke gave his long awaited testimony in front of the House Financial Services Committee. The testimony was short on details and stock markets responded with a 4.6% fall. The testimony signaled a return of risk aversion and Forex traders flocked to the US dollar and the Japanese Yen.

Plan Lacks Specifics

Markets and Forex traders had hoped that the plan, which was designed to help banks unload ‘toxic assets’ and inject capital, failed to address concerns about the troubled US banking sector. Forex traders responded by buying the Dollar and Yen. Bernanke’s prepared testimony failed to mention the purchase of Treasuries by the central bank. Meg Browne of Brown Brothers Harriman stated, “Bernanke hasn’t said anything yet that is new. The options to buy Treasuries remain open, but he didn’t mention it. The forex market is jumping a bit on this.”

Bernanke Fails to Convince Markets

In yesterday’s trading the Euro was down 0.9% against the Dollar, while the dollar fell 1.2% against the Yen as Forex traders sought safe haven. Bernanke also stated that there was no quick fix for the economic problems faced by the US. Bernanke stated that the Federal Reserve believes that many of the extraordinary measures taken by the Fed have already started to have an effect on market conditions. Obviously Forex traders and equities markets thought otherwise.

Fed’s Approach Inadequate

Many Forex traders and investors see the Fed’s approach as inadequate. Many analysts view the actions of the Treasury and the Fed as a ‘band aid’ approach. In an astounding statement Axel Merk, president and chief investment officer at Merk Investments, stated, “We do not see convincing evidence that the government is moving away from its Band-aid approach to helping banks. By now, the only viable solution left may be to nationalize the financial institutions that are deemed too big to fail; it’s then a political decision whether depositors should carry part of the cost.”

Testimony Disappointing

The effects of the long awaited testimonies by Fed President Bernanke and Treasury Secretary Geithner have been disappointing. Forex traders and investors had hoped that the return to risk appetite would be long lasting.

Risk Appetite

Both the US dollar and the Japanese Yen have benefited from the extreme risk aversion that has gripped Forex markets throughout the global economic crisis. Forex traders seeking safe haven have flocked to the dollar and the Yen. Occasionally there is a return to risk appetite but it is usually short lived.

Slight Elevation of Risk Appetite

Last week there was a slight return of risk appetite that caused both the dollar and yen to fall slightly. The surprising rise of the British Pound was short lived and risk appetite benefited the Aussie and New Zealand dollars. Forex traders quickly took advantage of new Forex opportunities caused by the slight elevation of risk appetite.

Dismal US Employment Figures

The release of dismal employment figures by the US prompted speculation by Forex traders that Washington will act quickly to pass the stimulus plan proposed by the new Obama administration. The return to risk appetite put pressure on both the dollar and the Yen as Forex traders sought out higher yielding currencies.

Waiting for Obama and Geithner

On Monday, February 9th President Obama and Treasury Secretary are expected to announce details of the proposed stimulus plan and attempt to convince opponents that the rescue package is necessary. Stock markets were up despite Friday’s report that revealed that 580,000 jobs were lost in January. Many Forex traders believe that these figures will convince opponents of the stimulus plan to vote for its passage.

Stimulus Passage Compromise

At present the rescue package is stalled in the Senate but majority leader Harry Reid said he believes that the Senate will ”be able to work something out.” Brian Dolan of Forex.com said, “Right now, investors are looking for the next big thing—fiscal stimulus and a banking rescue.”

On Monday February 9th Forex traders will be watching Washington closely. Most Forex traders believe that the US has been proactive in addressing the economic crisis and most believe that the US will be the first nation to recover from the recession. Hopefully they are right.

BOE and ECB Release Data

Last week was a busy one for Forex traders. Both the ECB and the BOE released new rates and on Friday the US released its job report which showed that more Americans have lost their jobs than at any other time since 1971. A rise in stocks triggered a return of risk appetite causing the Japanese Yen to fall against the Dollar and the troubled Euro.

Forex Traders Still Cautious

Many Forex traders were cautious while waiting for the US jobs report and unemployment in the US is expected to rise to 7.5%. Despite the expected job losses many Forex traders expect the bad news to help the dollar. Forex traders expect the bad news will be an incentive for legislators to support the Obama administrations stimulus programs.

Waiting For Obama’s Stimulus Plan

It is hoped by many that Republicans, who voted against Obama’s stimulus plans, will put ideology aside and support most of the measures proposed by the new administration. Gregory Salvaggio of Tempus Consulting stated, “Looking beyond today’s terrible figures, everybody now expects the President’s rescue plan to pass and pass fast. That is helping lift stocks and is taking some risk off the table, which in turn leads the market to sell yen and buy back some dollars.”

Eyes On Washington

Right now Forex traders and investors are watching and hoping for the next stimulus proposals in Washington. Since the US has been the most proactive in addressing the financial crisis most Forex traders expect the US to be the first nation that will recover from the recession. Newly elected US president Obama said the entire stimulus package was needed to avoid a “catastrophe.”

Signs of Recovery

Last week the Bank of England cut rates to a historic low of 1%, the lowest in 300 years. The European Central Bank left their rates as they are, a move many economists disagree with. In the coming months Forex traders will be looking for the slightest signs of recovery.

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.

Dollar Has Great Month

The news from the Euro Zone keeps getting worse and worse causing market volatility. The US dollar had its best month since October as it rose against the beleaguered Euro as Forex traders and investors sought safe haven. Lately there has been a back and forth between risk appetite and risk aversion but for Forex traders risk aversion seems to be dominant.

Massive Unemployment and Inflation

Worsening conditions in the Euro Zone caused the Euro to fall against both the US dollar and the Japanese Yen. Recently released data showed massive unemployment and inflation. Although markets expected a 5.4% decline in the US economy figures showed that the US economy actually shrank 3.8% in the last three months of 2008. This, in turn, helped to bolster the dollar for Forex traders.

US Economy to Slow in 2009

Many analysts expect the US economy to slow even further in 2009 but many Forex traders believe that although this will weaken the global economy further it will also make the Dollar more attractive as a safe haven currency. Vassili Serebriakov of Wells Fargo in New York said, “The dollar has been displaying resilience to bad economic numbers. There’

s some question about whether continued accumulation of very weak data will weaken this resilience, but for now, I think it suggests risk-aversion is still driving the currency market.”

Trading Driven by Risk Aversion

Forex trading has been driven by risk aversion lately with slight returns to risk appetite occasionally. This benefits both the US dollar and the Japanese Yen. The Yen benefits as Forex traders sell riskier currencies and assets that were financed by the inexpensively bought Yen. The US dollar benefits as Forex traders repatriate the currency into US treasuries.

Credit Downgrades

The Euro was down 1.2% and was trading at $1.2804, down 8.4 in January. Last month Standard & Poor’s downgraded the credit ratings of Spain, Portugal and Greece which Forex traders said hurt the Euro even further. In addition Moody’s Investor Service’s downgraded Ireland’s long term debt outlook which hurt the Euro even further.

Forex traders certainly have their work cut out for them in today’s volatile currency markets. The outlook for 2009 is not good and Forex traders will be looking for any opportunities that may arise.