G8 Positive About Economy

The weekend meeting of the G 8 nations yielded some positive viewpoints about the global economy. Finance Ministers believe the credit crisis is easing and described their respective economies in the most positive terms since the global recession began. Despite the positive tone of the meeting many participants expressed caution. Currency exchange rates were affected and on Monday the US dollar continued its rally which started on Friday. Investors took profits on high yielding currencies such as the Australian dollar and the New Zealand dollar.

Investors See Excessive Optimism

Many investors have doubts about what they see as excessive optimism about global recovery. Asian oil prices continued their slide putting pressure on commodity linked currencies. An unnamed senior trader at a Japanese bank stated, “The market began taking profits on gains in emerging market currencies as well as higher-yielding currencies before the G8 meeting, and this is continuing as many investors still have their doubts about the recent excessive optimism over an economic recovery.”

Too Soon to Withdraw Stimulus Programs

Although the G 8 meeting participants have started to consider how to withdraw the various stimulus programs in effect they also said there must be firmer signs of recovery before the stimulus programs are withdrawn completely. Although currency exchange rates were not on the G8 agenda the meeting had an affect on global currency markets. The euro to dollar rate fell 0.5% to $1.3942 after hitting a recent high of $1.41. The recent high triggered automatic sell orders from investors putting downward pressure on the euro. The euro came under further pressure after the UK Daily Telegraph reported that a top German industrial group warned that the credit crisis is getting worse in Germany.

BRIC (Brazil, Russia, India, China) Meeting Tuesday

In the near future investors will be watching the BRIC (Brazil, Russia, India, China) meeting closely. Russian Finance Minister Alexei Kudrin said in advance of the meeting that the dollar’s status as a reserve currency is unlikely to change in the near future. The statement helped the dollar exchange rate against other major currencies. The BRIC nations are not expected to discuss an alternative reserve currency at their Tuesday meeting.

Quite a bit of economic data from many sources is expected this week and is expected to contribute to already volatile forex trading.

US Auction Well Received

The dollar to euro rate rose on Wednesday after the US government sold $19 billion in 10 year notes. Investors were reassured about the US’s ability to sell long term debt to ease mounting deficits. The dollar to yen rate was also affected by the auction. The US Treasury sold the 10 year notes which have a high yield of 3.99%. The sale was part of a combined auction of $65 billion of US debt. Investors saw the auction as a test of the US government’s long term borrowing ability.

Auction ‘Dollar Positive’

The results of the auction were dollar positive. Michael Woolfolk of Bank of New York Mellon stated, “There were concerns about appetite for Treasuries. The results of this auction have put to rest those concerns for the time being and any peripheral fears about the dollar as a safe store of value have also been put aside. This is positive for the dollar overall.”

Euro’s Rise Triggers Automatic Sell Off Orders

The Euro’s rise above $1.40 triggered automatic sell off orders and put downward pressure on the euro. The euro to dollar rate fell to $1.3952 a decline of 0.7%. Investor concerns about long term economic recovery pared gains made by high yielding stocks and currencies. The dollar to yen rate rose 0.9% to 98.27 and the dollar to pound rate fell from a high of $1.6473 to $1.6276.

US Treasury to Sell $2 Trillion in Debt This Year

The US Treasury plans to sell $2 trillion in debt this year triggering investor concerns and affecting currency exchange rates. The announcement that Russia planned to reduce its purchases of US Treasuries put pressure on the dollar Tuesday. Despite concerns about rising US deficits recent auctions of US debt have been well received. Firas Askari of BMO Capital Markets stated, “The U.S. Treasury market is still the deepest and most liquid available.”

Although many traders hold a pessimistic view of the future of the dollar, recent gains are good news for the US. Many experts expect currency exchange rates to follow the lead of equities markets.

Dollar Rallies on Better Than Expected Jobs Data

The US dollar staged a rally late last week after better than expected jobs data showed that the rate of job losses in the US sharply declined in May despite the news that General Motors was closing several manufacturing facilities across the US. Currency exchange rates were also affected by speculation that the US Federal Reserve will raise rates by the end of the year. The euro was pressured downward after Standard and Poor’s downgraded Ireland’s credit rating for the second time this year.

Speculation That Fed Will Hike Rates in 2010

The dollar to euro rate gained 0.85 to $1.3855. Brian Kim of UBS AG stated, “The market is speculating that the Fed is more prepared to hike rates. The S&P’s downgrade of Ireland is also weighing on the euro.” Kim also believes that within a month the dollar to euro rate will weaken to $1.40. The euro to yen rate fell 0.9% to 136.51 from 137.81 yen. The dollar to yen exchange rate is currently 98.62.

Dollar Index Gains

The Dollar Index (DXY) which measures the dollar against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish Krona gained 1% to 81.466, the highest since May 20th. The dollar has fallen in the last three months against all the major currencies except the yen and currency exchange rates have been affected by speculation that the Fed’s purchase of $300 billion in treasuries could debase the dollar.

Pound Volatile

The pound to dollar fell on volatile trading as Prime Minister Gordon Brown’s Labour Party feel to its lowest point in almost a century. The pound fell 0.4% to $1.5913 as Labour came in third in recent national elections in Britain. Labour posted its first loss to Conservatives in Wales for the first time since 1918.

Conservatives Sweep European Elections

Currency exchange rates are bound to be affected by the conservative sweep of the European Parliament elections. Center right parties made huge gains in many Euro Zone nations and may signal new economic and monetary policies affecting global currency exchange rates in the near future.

GM Bankruptcy Causes Concerns

The yen to dollar exchange rate rose for a second day and also gained vs. the euro after the US government announced that General Motors will file for bankruptcy. The Japanese yen maintains its status as a safe haven currency as some currency experts are beginning to question the US dollar’s safe haven status. The Japanese yen rose against 13 of the 16 most traded currencies in global forex markets. Many traders see the announcement by GM to close 11 factories as a sign that the US recession is far from over.

ECB May Plan More Quantitative Easing

The euro to pound rate fell on concerns that the European Central Bank will announce plans for more quantitative easing at their June 4th meeting. The dollar index declined the most in three weeks as investors remain concerned that the US government will own a 60% stake in a bankrupt company. The Obama administration issued a statement that said the government is “a reluctant equity owner,” of GM. Currency exchange rates have been greatly affected by concerns about mounting US debt. Susumu Kato of Calyon Securities stated, “The trend is for a decline in the dollar on the deteriorating quality of U.S. government debt.”

Dollar Sell Off

The euro to dollar exchange rate gained 0.2% trading at $1.4178 after reaching a high of $1.4246, the highest since December. The pound to dollar rate rose to a seven month high of $1.6436. Other winners were the Aussie and Kiwi dollars which traded at $0.8137 and $0.6520 respectively. Brian Dolan of Forex.com said, “This is a market that is in the process of selling the dollar against everything, buying commodities, and that should continue today. The move has taken on something of a self-fulfilling quality to it now.”

Currency exchange rates for the US dollar are being driven by the perception that the worst of the recession is over and investor concerns about mounting US debt. Barring an exceptional event the rest of the week does not look good for the greenback.