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.

Forex Traders Paying Close Attention to Auto Bailout

Forex traders around the world are following the progress of talks between the US congress and the three major American automakers. The influence of the US auto industry extends into almost every facet of the US economy. The future of the US auto industry could have a profound effect on the US dollar and forex trading globally.

Automakers Employ 2.5 Million

The automakers employ approximately 2.5 million people directly millions more at businesses that service the auto industry. The failure of the US auto industry would have a catastrophic effect on the US economy and result in millions of lost jobs. This, in turn, would send the US economy into a downward spiral that could be irreversible.

Execs Offer Plan

After the public relations disaster that was the last meeting between lawmakers and the chief executives of the auto industry the executives eschewed corporate jets for the trip to Washington. This time the automakers have a plan that includes restrictions on executive compensation and golden parachutes which have caused widespread resentment among the public.

Fear of Economic Collapse Spurs Bailouts

Although free market advocates have objected to the bailouts, arguing that bankruptcy would be a more effective way of sorting out problems in the auto industry, fear of economic collapse makes it likely that the bailouts will go forward. Forex traders and investors have been watching economic news from the US with great interest. The Bush administration opposes the automaker bailout suggesting that the industry take $25 billion in loans to retool aging factories. The administration also remains opposed to the $700 billion dollar bailout for financial institutions.

US Economic Data Weak

Economic data from the US has been weak and many leading economic indicators have been worse than expected. All indicators point to a recession that may take years to recover from. In the meantime Forex traders have been taking advantage of the strength of the US dollar on currency exchanges. Recession fears and risk aversion have been major factors affecting the performance of the dollar and how long this will last is anybody’s guess.