Bernanke’s Remarks Help Dollar

The US dollar recouped some of this weeks losses after Federal Reserve Chairman Ben Bernanke said he was contemplating an exit strategy from quantitative easing and low interest rates. After a heavy pummeling this week the greenback pulled back from a 14 month low against other major currencies. Many investors and traders have seen quantitative easing and low interest rates as the main causes for the dollar’s weakness.

Fed May Change Policies

In a statement late Thursday Bernanke said that the Fed has the ability to change both policies but said that present policies are likely to be continued in the near future. Recently the US dollar has fallen on very weak economic data and dismal employment figures and Bernanke’s comments were seen as dollar positive. Ulrich Leuchtmann of Commerzbank stated, “Explanations by Fed officials have been helpful in clearing the air on what strategy will be taken as the economy recovers. The market is not yet ready to jump on the rate rise outlook to aggressively buy the dollar.”

Asian Dollar Demand

The dollar vs. yen rate rose 0.8% to 89.13 yen pulling back from an eight and one half low against the yen. Traders reported that dollar demand from Japanese investors helped to bolster the greenback in European markets. The euro fell to $1.4725 falling from a two week high of $1.4815 on Thursday. On Thursday ECB President Jean-Claude Trichet said that US support for a strong dollar was important. The DXY which tracks the dollar against six major currencies rose 0.4% to 76.250, pulling back from a 14 month low of 75.767.

Dollar’s Reserve Status Secure

Many currency analysts believe that some of the US dollar’s troubles come from speculation that the dollar may lose its status as a global reserve currency. Although some countries have suggested replacing the dollar as a reserve currency the dollar’s status as the world’s top reserve currency status seems secure for now.

US Dollar Resumes Slide

The US dollar declined against a basket of major currencies on Wednesday (Sept. 23rd) hitting a one year low. Currency traders dumped the greenback on speculation that the Fed will keep rates at record lows sending investors in search if higher yielding assets. Tohru Sasak of JP Morgan Chase Bank stated, “Dollar selling quickly spread to a wide-range of currencies as the dollar resumed its slide the previous day. The dollar is vulnerable at the moment as it is around key levels against many currencies, hovering in areas where lots of loss-cut selling orders await.”

Kiwi Continues Winning Streak

The New Zealand dollar resumed last week’s winning streak against the dollar and rose over one cent to $0.7315 the highest since August 2008. Better than expected New Zealand GDP data indicated the economy unexpectedly pulled out of recession territory during the second quarter. The dollar index, or DXY, fell 0.27% to 75.913 after hitting a low of 75.892. The DXY has declined over 2.5% this month as currency traders sold dollars in favor of higher yielding assets.

Aussie at 13 Month High

The Australian dollar rose to a new 13 month high in tandem with the Kiwi dollar. The Aussie was up 0.4% to $0.8769. Rising risk sentiment has pressured the greenback downward a trend many experts expect to continue. Jonathan Cavenagh of Westpac said, “It is a bit odd that the kiwi is leading the rally in the majors, but it just tells us about the sentiment and the risk reversal that has taken place. The broad theme is U.S. dollar weakness, and we must say it is looking ugly technically too.”

Dollar Falls vs. Yen

The dollar vs. yen fell 0.4 % to 90.72. Forex traders said that many stop loss orders were set for around 90.90 making the decline sharper. An unnamed forex trader at a Japanese bank stated, “Regarding the dollar/yen, we thought stops had been cleared out after the pair fell near 90 yen many times last week. But moves this morning showed there were some more out there. Also, speculators really want to push down the greenback, even against the yen.”

This week currency trading is expected to be driven by the FOMC meeting and the upcoming G 20 summit in Pittsburgh.

Dollar vs. Yen Gains 1%

The US dollar rose on Monday against the Japanese yen as investors pulled back from bets against the greenback in advance of the Federal Open Market Committee meeting and the G 20 summit scheduled later this week. The dollar vs. yen rate gained slightly more than 1% although gains were limited due to light Asian trading as Asian financial centers were closed for a holiday. The absence of economic data spurred investors to take profits from currencies which rallied against the US dollar last week.

Fed May Announce Exit Strategy From Quantitative Easing

Some Forex experts are speculating that the Fed may announce an exit strategy for quantitative easing. Chuck Butler of Everbank World Markets stated, “There are some thoughts in the markets that the (FOMC) might announce that they’re going to start removing stimulus. That’s why the dollar is a little bit stronger. I don’t think this is any trend reversal of what we’ve seen from March on. This could just really be a correction. Last week’s run-up (in other currencies) was huge.” Last week the Aussie and Kiwi dollars were big winners but gains have been pared in advance of the FOMC and G 20 meetings.

DXY Highest Since September 10th

Despite speculation the FOMC is expected to keep rates at their present level but Forex markets will be watching for signs of the Fed’s exit strategy. In New York the ICE futures, which tracks the greenback against a basket of major currencies, rose 0.4% to 76.746 DXY the highest since September 10th 2009. The US dollar benefited from lowered risk sentiment due to a decline in the FTSEurofirst 300 index which fell below 1,000. The FTSEurofirst 300 index tracks the performance of Europe’s largest 300 companies by market capitalization.

Caution in Advance of G 20 Meeting

Investors are also cautious in advance of the G 20 summit on Thursday and Friday in Pittsburgh. Boris Schlossberg of GFT Forex said that rhetoric in advance of the G 20 meeting promoted profit taking in risky assets and any future regulation of capital markets could spark a rise in risk aversion.

UK Unemployment Figures at Highest Level Since 1995

The pound fell to a four month low as UK unemployment figures rose to the highest level since 1995 paring recovery hopes in the UK. The pound to euro exchange rate fell to 89.01 pence per euro. The Office for National Statistics reported that the number of people in the UK seeking employment increased by 210,000 to 2.47 million. Vincent Chaigneau of Societe Generale SA stated, “The market had a shock yesterday and the data this morning was not strong enough to reverse the trend. The data confirmed what King said yesterday, which is that we can pretty much rule out a strong recovery. It was a wake-up call for the market.”

BOE May Cut Rates

The UK unemployment rate rose to 7.9% compared with 0.5% in the Euro Zone, 9.7% in the US and 5.7% in Japan. Bank of England Governor Mervyn King told MP’s that the BOE is “looking at” cutting deposit rates to stimulate lending by financial institutions. The BOE’s next policy meeting is October 8th and investors will be watching closely.

Euro Extends Gains

On Wednesday (Sept. 16th) the euro extended recent gains against the US dollar hitting a nine month high. The euro to dollar exchange rate rose to $1.4705 rising above $1.47 for the first time since September 2008. In contrast the DXY fell to its lowest in a year to 76.262. Rising risk sentiment has put pressure on the dollar as forex traders sell the dollar in favor of higher yielding currencies. Lauren Rosborough of Westpac stated, “The general dollar-selling trend remains in place. The $1.4720-1.4750 region should be capped in the short term, but once we get into New York trade the tendency will be to push the dollar lower.”

Aussie and Kiwi Dollars Gain

On Wednesday the dollar fell to a one year low against a basket of major currencies as rising stocks and deficit concerns pared demand for the greenback. The Aussie and Kiwi dollars have been the chief beneficiaries of the demand for higher yielding assets. Both Australia and New Zealand offer significantly higher three month deposit rates than the US and Japan.

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.

Q 2 Reports Affect Currency Trading

Last week currency trading was largely affected by second quarter US corporate earnings reports. The stellar performance of Goldman Sachs, Intel and JP Morgan triggered a slight rise in risk sentiment among investors and currency traders. These results were followed by bad news from General Electric and Bank of America Corp. which dampened hopes of recovery.

‘Difficult Challenges Ahead’

Bank of America, the US’s largest bank. Said that net income fell by 25% during the second quarter and warned of further losses due to troubled loans for credit card, mortgage, and business customers affected by job losses and a weak economy. Bank of America Chief Executive Kenneth Lewis said. “Difficult challenges lie ahead from continued weakness in the global economy, rising unemployment and deteriorating credit quality that will affect our performance for the rest of the year and into 2010.”

Markets Lack Direction

Currency trading last week was somewhat volatile and many analysts said markets lacked direction. Mixed earnings reports caused investor caution lifting the dollar late in the week. Falling risk sentiment left many currency traders wary of higher yielding currencies like the Aussie dollar. Steven Butler of Toronto-based Scotia Capital said that the Euro’s failure to rise above the $1.41 lever reflected investor anxiety about the economy. Markets ignored euro zone trade data which showed a 1.9 billion euro surplus and also ignored the dollar positive comments by Japan’s top financial diplomat who said that the dollar would remain a core asset in Japan’s foreign currency reserves currently at $1 trillion dollars.

Next Week’s Economic Calendar

Factors likely to influence currency trading this week include June’s leading economic indicators due Monday, the weekly report on U.S. petroleum supplies due Wednesday, and weekly initial jobless claims and June’s existing home sales due Thursday. Speaking about last week Greg Salvaggio of Tempus Consulting said, “This has been a difficult market for forex traders.”

Goldman Sachs and US Retail Sales Figures Boost Risk Appetite

On Tuesday a slight return to risk appetite as investors pondered figured from Goldman Sachs and US retail sales figures. Earnings figures from Goldman Sachs and retail sales figures exceeded expectations giving some modest hopes for recovery from the recession. Many traders and forex investors remained wary ahead of Q2 earnings figures from other US financial institutions.

Euro Pressured by German Data

The rise in risk sentiment benefited the Australian dollar while the euro was pressured by German data. According to a poll by German think tank ZEW German economic sentiment fell for the first time in nine months. Greg Salvaggio of Tempus Consulting stated, “Retail sales were better than expected, so that’s a bit of good news, but there’s been little follow-through as the market is uncertain which way it wants to trade.” Many traders noticed that t a lot of the 0.6% increase in June retail sales was driven by higher gas prices.

Aussie Dollar Up

The higher yielding Aussie dollar rose 0.8% to $0.7889 boosted by high Australian business confidence. The pound rose by 0.4% to $1.6297 bolstered by better than expected home price data and higher retail sales data. The dollar to yen exchange rate rose 0.3% to 93.30 up from 93.15. Better than expected US retail sales data and producer prices put downward pressure on the Yen which has been the chief beneficiary from recent risk aversion.

Some Analysts Say Risk Appetite Not Sustainable

Markets have reacted quickly to any positive data that indicates that recovery is under way. Last week saw increased risk aversion as investors waited for second quarter earnings from US corporations and banks. Forex traders also kept a close watch on the G 8 summit that took place last week. Many currency experts advise caution saying the current Goldman Sachs and US retail sales data are not enough to sustain the current rise in risk appetite.

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.