Retail Sales, Consumer Confidence Up
The US dollar gained on the euro and yen as a better than expected retail sales report fueled economic optimism. Equity markets were lifted by positive Chinese economic data prompting investors and traders to seek high yielding currencies and investments. US retail sales rose 1.3% in November as US consumers spent money on a wide range of products and goods. Boris Schlossberg of GFT Forex said, “This is another notch in the belt for the recovery bulls. It is really an unexpectedly powerful number. The report also confirmed what we saw overnight, which was very good Chinese data, suggesting that global recovery is gaining momentum.” The data increased speculation that the US Federal Reserve will raise rates sometime next year although Fed Chairman Bernanke has said rates would remain low for an extended period.
Yen Pressured by Risk Appetite
The Japanese yen fell against the 16 most traded currencies as evidence of economic recovery prompted demand for riskier assets. Some currency analysts predict a shift from the dollar to the yen as a funding currency for carry trades. Michael Hart of Citigroup stated, “We’re shifting decisively into a new trading regime. We’ll see a shift of the prime funding currency away from the dollar to the yen. That will be yen-negative.”
Dollar May Trade on Fundamentals Rather Than Risk
The dollar index rose 0.7% to 76.609 for a weekly gain of 0.9%. The dollar index has dropped 6% so far this year and the Fed’s benchmark rate of 0 to 0.25% has made the dollar a popular funding currency. The risk based trading pattern for the dollar changed last week as better than expected US employment figures sent the dollar higher in currency markets. Andrew Busch of Bank of Montreal said, “That the dollar strengthened against the euro changes this risk-on, risk-off scenario.” He also said trades “will morph into something else.” Many believe that the dollar will trade on fundamentals rather than risk in the near future.
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