Economic Optimism Premature

For the last two months forex traders and investors have been reading about the ‘green shoots’ of recovery theory which has affected currency exchange rates. Although many experts warned that the optimism displayed was premature investors searched for signs that the worst of the global recession was over. Recent unemployment data from the US and weak industrial figures from the US combined with poor stock market performance have left doubts about the progress of global recovery.

Risk Aversion Benefits Dollar and Yen

Risk aversion is with us once again and as usual the chief beneficiaries are the US dollar and the Japanese Yen. 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.”

Yen Big Winner

The biggest winner in the return to risk aversion has been the Japanese Yen. On Tuesday the dollar to yen exchange rate fell 0.6% to 94.72 while the euro to yen rate fell 1.1% to 131.81. The pound to dollar rate fell 0.9% to $1.6119 due to weak industrial output data from the UK.  Forex traders and investors are awaiting second-quarter U.S. corporate earnings which will be released in the next few weeks. Poor results will affect currency exchange rates and drive demand for the dollar and yen.

Focus on G 8 Summit

Investors are also watching the G 8 summit taking place this week in Italy. China and Russia are expected to force discussion of the dollar’s status as a reserve currency. Both nations have expressed a desire to replace the dollar as a reserve currency. For now forex investors will be closely watching the G 8 summit and waiting for US Q 2 corporate earnings.