Fed Has Positive View of US Economy
The greenback fell slightly on Thursday as the Fed announced that interest rates would continue at historical lows and the purchase of Treasuries would be extended for a month. The Fed also had a more positive view of the US economy raising risk appetite and pressuring the dollar. High yielders such as the Australian and New Zealand dollars rose. The Aussie dollar was up 0.3% to $0.8364 and the Kiwi traded at $0.6736 a rise of 0.3%.
Rising Risk Sentiment
A trader at a European bank said markets saw the Feds statement as dovish and risk positive and dollar negative. In a cautionary statement the unnamed trader said, “But equity markets still don’t look like they have that much steam behind them so people are cautious about piling into risk trades at the moment.” US retail sales data is scheduled for release Thursday and a Reuters survey said that economists expect a 0.7% rise, up from 0.6% in June. US jobs data is expected to show that 545,000 Americans filed for unemployment benefits for the period ending August 8th.
Unexpected Drop in US Retail Sales
An unexpected drop in US retail sales caused the dollar/yen exchange rate to fall. The data shows that US consumers are reluctant to increase spending. The dollar traded at 95.40 in Tokyo a decline of 0.6%. The euro/dollar exchange rate fell 0.7% and the euro traded at $1.4290. Disappointing retail sales data had some forex traders wondering about the dollar’s reaction to the data. Lauren Rosborough of Westpac Banking Corp stated, “You get a number like this and you have people sitting down and scratching their heads. Everyone expected retail sales, in particular the headline number, to be exceptionally good and going into a more risk-positive sentiment.”
Gold Advances
On Wednesday gold advanced for the second day as a decline of the dollar and positive economic news spurred demand for the precious metal and other commodities. Gold rose as much as 0.4% and traded at $951.34 in Asia. For the year as a whole gold is up 7.8%.
Dollar Falls Slightly Against Euro
Currency traders and investors became somewhat cautious in advance of Wednesday’s FOMC statement. The US dollar fell from a one and a half week against the euro and the dollar struggled against the yen in a trading session that many described as ‘choppy.’ Forex markets saw waning risk sentiment in advance of the Fed’s rate decision. The euro recovered in late trading Tuesday and rose 0.2% to $1.4165. Euro Zone industrial production figures caused little reaction in currency markets and many analysts felt that markets ‘lacked direction’ in advance of the Fed statement.
Fed to Keep Rates Steady
Most experts believe that the Fed will keep interest rates steady but investors are concerned whether the central bank will end the purchase of buying long-term government securities. Analysts at Commerzbank stated, “The market is currently pricing in a 50 percent probability that the first rate hike will take place at the end of Jan. 10 and Fed comments pointing towards a later date could be short-term dollar negative.”
Yen Up on Safe Haven Demand
The Japanese yen rose to its highest in two weeks against the euro as global stock markets declined increasing safe haven demand. Elisabeth Andreew of Nordea Bank said, “If there’s more panic and losses in stock markets, then we’ll see the yen going stronger. There’s anxiousness about the real economy and people are questioning whether gains in risky assets were justified.” The European Dow Jones Stoxx 600 Index fell for the third straight day affecting currency exchange rates.
Chinese Production Falls Short of Predictions
The yen also gained on both the Aussie and Kiwi dollars as Chinese data showed less than expected growth. Chinese industrial production fell short of predictions causing a decline in risk sentiment. At present both stock and currency markets are awaiting the results of the Fed meeting.
Dollar at Seven Week High
Currency markets were active last week and Friday’s US jobs report showed better than expected results. The report showed a deceleration of US job losses but this time the reaction of investors was different. In the past good economic news put downward pressure on the dollar as investors dumped dollar denominated assets in favor of higher yielding currencies. Friday’s news sent the greenback to a seven week high against other major currencies providing many with Forex opportunities.
Dollar Stock Correlation Changing
Many currency traders saw Friday’s results as a sign that the dollar’s usual correlation to the stock market is changing. Usually the dollar rises when the economic news is negative causing investors to seek the safe haven of the dollar. For the past year the dollar has generally followed the lead of stock markets. When stock markets are performing well the dollar falls and if the news is bad the dollar rallies. Investors are now betting that the United States will be the first developed country to recover from the global recession.
Euro/Dollar and the S & P 500
Earlier in the year the correlation between the Euro/dollar rate and the Standard & Poor’s 500 index was 50%. Simply put the euro rose and fell following the S & P 500 index 50% of the time. That link has slipped recently to 30% to 40%. Many now see the euro/dollar pair breaking out of this pattern. Greg Salvaggio of Tempus Consulting stated, “I think this could be the start of the unwinding of the inverse stocks-dollar correlation. We’ve seen improvement in housing, in manufacturing output and now clearly in the job environment.”
Signs of US Recovery
Many traders see sign of US recovery in recent housing, manufacturing and jobs data. While the US economy is not entirely out of danger many are optimistic. President Obama said that the US may be seeing” the very beginnings” of the recession’s end. Currency exchange rates are bound to be affected by this week’s economic calendar. The Federal Reserve meets Tuesday and the Treasury plans to auction off $75 billion in US debt. Hopefully the news from the US will continue to be positive.
