FOMC Meeting Minutes Released

Wednesday’s release of the Federal Open Market Committee’s (FOMC) meeting minutes pushed the euro to its highest level against the US dollar since January. The euro to dollar exchange rate was prompted by rising stocks and the belief that the US will be the first to recover from the global recession. The dollar has declined against the euro for the last three trading sessions. At the close of Wednesday’s session the euro was trading at 1.3604.

Fed May Go Over the Present $1.75 Trillion to Purchase More Debt

The FOMC minutes indicated a willingness of the Federal Reserve to go over the $1.75 trillion already committed to purchasing mortgages and other assets. Many traders believe this move could devalue the US dollar since the Fed has to print more money to pay for the increased purchases. Currency exchange rates were affected as investors shrugged off the bad news and moved towards higher yielding and riskier investments.

Better Euro Zone Data

The euro to dollar exchange rate rose 1% to 1.3768, up from 1.3630 on Wednesday. In early forex trading the euro to dollar rate touched 1.3830, the highest since January. The euro fell slightly after a German report showed producer prices falling at the fastest rate in 22 years. Flash Manufacturing PMI and the Flash Services PMI (covering the German, French and Euro-Zone) are expected to show the manufacturing and services sectors contracting at the slowest rate in 7 months.

Japanese GDP Declines

Currency exchange rates were affected after the Japanese Cabinet Office said that Japanese GDP declined 3.5%, the most since 1955. Speculation that the US economy is far from recovering boosted demand for the yen on global currency markets. After falling as low as 94.33 the yen to dollar exchange rate rose slightly to 94.52 late Wednesday. The Bank of Japan starts a two day policy meeting on Thursday but the meeting is not expected to affect currency exchange rates. With stock markets performing well the rise in risk sentiment is expected to continue.

Euro Zone Decline Continues

Last week the risk appetite that had dominated currency markets for the previous two weeks came to an abrupt halt. Despite warnings from experts that economic optimism was premature many investors and traders adopted the ‘green shoots of recovery’ theory. The euro to dollar exchange rate posted record monthly gains and commodity based currencies such as the Canadian and Australian dollars rose. Data that showed the Euro Zone economy declining at its fastest pace ever triggered a return to risk aversion benefiting the US dollar and the Japanese Yen.

Yen Supported by Safe Haven Demand

A drop in Asian and European shares provided support for the Yen and the Dollar as investors sold riskier currencies and returned to the safe haven of the dollar and yen. The dollar index which measures the dollar’s performance against six major currencies rose 0.2 late Friday to 83.161 .DXY affecting the dollar exchange rate. The euro to dollar exchange rate fell 0.4% to $1.3436 down from a high of almost $1.37 last week.

ECB Council Member Calls For Caution

The euro dollar exchange rate was also affected last week by remarks from ECB council member Axel Weber warned against “exaggerating” recent data suggesting the economy is stabilizing. In an interview with Financial Times Deutschland Weber stated, “The crisis has yet to reach the people via job losses. Calling an end to the crisis too early is very risky. People will be disappointed and that could have an enormous impact on confidence.”

This Week to be Dominated by Equities

Stocks are expected to influence currency exchange rates throughout the coming week. Sue Trinh of RBC Capital Markets stated, “We’re in for another week dominated by equities and given the poor close of the U.S. market, there is caution about a sell-off in risk. “The VIX index known as Wall Street’s ‘fear gauge’ rose 5.6% indicating increased pessimism and affected currency exchange rates.

According to most experts currency exchange rates will follow trends in global stock markets this week.

Uneventful Week Expected

This week’s economic calendar promises to be relatively uneventful and traders expect currency exchange rates to be affected by stock market performance. French and Italian production figures are due this week and could affect the euro to dollar exchange rate. The production figures are expected to show the fourth consecutive month of double digit declines in both Euro Zone countries. Exports account for 40% of the Euro Zone’s economy and negative production figures are expected to pressure the euro.

Bernanke Expected to Speak

On Monday Federal Reserve Chairman Ben Bernanke is expected to speak about the results of US bank stress tests and Bernanke’s comments tend to affect markets and currency exchange rates. A return to risk aversion on Monday has bolstered the US dollar and the Japanese Yen as investors take their cue from equities markets.

European Shares Fall

On Monday European shares fell and US stock futures pointed to a lower open for US stock markets. This has bolstered the dollar as forex investors pull back from last week’s rise in risk appetite. The euro to dollar exchange rate has fallen 0.5% to $1.3580 after hitting a seven week high of $1.3670. The euro to yen exchange rate fell 1.4% to 132.33 after reaching a one month high of 134.81.

Risk Appetite Unsustainable

Some experts are saying that last week’s rise in risk sentiment was premature and that there are few near term events to sustain risk appetite.  Many traders expect currency exchange markets to follow stock market trends this week in the absence of significant economic data. The fading risk rally sent the Aussie dollar 0.8% lower to $0.7630 and the Kiwi dollar was down 0.3% to $0.6018 after climbing to a six month high of $0.6100.

No Significant Data Expected

Aside from Bernanke’s remarks there are no economic reports of significance due this week. Currency exchange rates and risk sentiment are most likely to be affected by stock market performance.

US Dollar Rebounds

On Tuesday the US dollar rebounded against the Euro as US stocks fell triggering a return to risk aversion. The euro to dollar rate fell as investors took profits from the Euro’s recent rise in advance of the ECB meeting scheduled for Thursday. The central bank is expected to lower rates but there is still no word whether the bank will follow the lead of the US Federal Reserve and use unconventional measures to address the ongoing recession.

Investors Waiting For Stress Tests Results

Investors are also waiting for the results of US bank stress tests causing fluctuations in the euro to dollar exchange rate. Various news agencies have reported that the Bank of America may need additional capital of $34 billion dollars. The stress tests are expected to show that 10 out of the 19 major US banks will need additional capital raising investor concerns about the health of US banks.

Many “Overly Optimistic” Say Some Experts

Some economists believe that recent positive manufacturing data has caused many to become “overly optimistic” about economic recovery. This optimism has affected currency exchange rates causing investors to seek higher yielding assets. Many forex traders remain cautious in advance of the stress tests. Michael Woolfolk of Mellon in New York stated, “The stress test will have some negative implications, Despite the fact that we’ve had some good numbers recently…we have conditions which I think really call for some caution.”

Bernanke Says Recovery to be Slow

Optimism has boosted stock markets in recent weeks reducing demand for safe haven assets and affecting US dollar exchange rates. Most traders expect recovery to be slow and Federal Reserve Chairman Ben Bernanke said that recovery would be slow and the jobless rate will continue to rise. The results of the ECB meeting will undoubtedly affect global currency exchange rates.

Risk Appetite Pressures US Dollar

Better than expected data from the US triggered a rise in risk sentiment among currency traders putting pressure on the US dollar and the Japanese Yen which are traditionally seen as safe haven currencies during troubled times. The euro to dollar rate was affected as the dollar fell against the euro for the fourth straight trading session. The yen is at a two week low against both the dollar and the euro.

Investors Wait For US bank Stress Test Results

Currency trading is expected to be light in advance of the May Day holiday celebrated in both Europe and Asia. Many investors remain cautious in advance of Monday’s results of US bank stress tests. The Australian and New Zealand dollars were the biggest winners in forex markets. US stocks rose on Friday also affecting currency exchange rates globally.

US Manufacturing Increases

Data showing a rise in US manufacturing and increased consumer confidence also affected both the euro to dollar and yen to dollar exchange rates. Wednesday’s positive statements by the US Federal Reserve raised investor confidence. The Fed will leave rates at 0.00% to 0.25% and said that economic contraction is slowing. The Fed also noted problems with credit markets which are having an adverse effect on business.

Fridays Exchange Rates

The euro to dollar exchange rate rose 0.3% to $1.3258 and the euro to yen rate reached 132.33 up 1.2% from Thursday. The dollar to yen exchange rate rose 0.7% to 99.46 after reaching a two week high of 99.58. Both the Aussie and Kiwi dollars made significant gains against the US dollar. The Australian dollar rose 0.7% to $0.7304 while the Kiwi rose 0.8% trading at $0.5693.

Pandemic Concerns

Also affecting currency exchange rates are concerns about the health of the US banking sector and the results of US bank stress tests are due Monday. Concerns about the possibility of a flu pandemic affected currency exchange rates earlier in the week. Some analysts believe that negative results of US bank stress tests could trigger a return to risk aversion.