Pound Reverses Recent Decline

The pound reversed its recent decline against the euro and the yen as UK inflation data weakened arguments that the Bank of England should keep rates at historic lows. UK inflation data was “slightly stronger than expected” according to currency strategist at Barclays Capital in London. U.K. Chancellor of the Exchequer Alistair Darling said that the UK inflation rate is expected to reach about 3% in 2010. On December 10th the Bank of England left rates at 0.5% and kept its bond purchase program at 200 billion pounds. ($326 billion USD) UK Policymaker Kate Barker said she is cautious about increasing the bond purchase program calling the UK economy “bumpy and uneven.” She also stated, “There are reasons to think you wouldn’t want asset prices to go up too far. For me, there’s a bit of caution about how much further I’d like to take the policy.”

Euro Pressured by Austrian Banking Concerns

The euro was pressured by Austrian banking woes which came on the heels of recent Greek fiscal concerns. The Austrian press reported that the country’s central bank and its financial market regulator have put the country’s top cooperative bank on a watchlist. A spokesman for Oesterreichische Volksbanken said the bank is not at risk of nationalization and that the reports were inaccurate. The report prompted concerns about the health of the EU’s banking sector. Earlier in the week the announcement of the $10 billion dollar bailout for Dubai had eased banking concerns. Many European banks are heavily exposed to Dubai debt.

Lingering Greek Fiscal Concerns

Greek fiscal concerns remain despite the announcement of spending cuts by Greek Prime Minister George Papandreou. Tomohiro Nishida of Chuo Mitsui Trust and Banking company stated, “Persistent concerns about sovereign risk in Europe such as those in Greece and softer stock markets are lending support to the dollar.” Investors are waiting for the results of the Fed meeting taking place today and Wednesday.

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Dubai Bailout

The euro rose and the Japanese yen fell on news that Dubai had received a $10 billion  bailout from Abu Dhabi to enable the country to pay a $4.1 billion Islamic bond which matures on Monday. Last month the news that the Dubai government holding company Dubai World may default on its debts sent shockwaves through global markets. The news of the bailout lifted risk sentiment in global markets. Jun Kato of Shinkin Central Bank Research Institute in Tokyo stated, “The announcement eased concerns about the Dubai debt troubles to some degree, but it will likely be temporary and the positive impact on stock and currency markets seems to be short-lived.” In November the yen had benefited when Dubai worries were at their height as investors sought safe haven assets. The yen is widely used to fund carry trades and usually rises on risk aversion.

Euro Gains Likely to be Capped

Currency analysts said the euro benefited from the bailout but said gains were likely to be capped due to market liquidity decreases in advance of years end. Kasper Kirkegaard of Danske Markets in Copenhagen stated, “The Abu Dhabi news helped risk sentiment, boosting the euro. The yen suffered from a squeeze (in long yen positions). But we should be careful; the markets are thinning out so we could see some volatile moves.”

Euro Zone Data

Euro Zone economic data released Monday showed euro zone industrial production in October and rising unemployment. European Union statistics office Eurostat said that the euro experienced a month to month fall of 0.6% and a year on year decline of 11.1%. Some economists say that decreased industrial production indicates that euro zone recovery may be prolonged and weak. European Union statistics office Eurostat said of ING stated, “The marked relapse in industrial production in October is a sobering reminder of the fragility of the economic recovery in the euro zone,”

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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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Dollar Rallies on Jobs Data

The US dollar rallied strongly against other major currencies as US jobs figures were much better than expected. Markets had forecast job losses of 130,000 and employers shed 11,000 jobs in November. The figures were so unexpected that some analysts thought they were a misprint. Fabian Eliasson of Mizuho Corporate bank stated, “A jobs recovery is the last piece of the puzzle before we can say we’re in full recovery, so it raises the question that maybe rates will go up sooner rather than later. That’s pushed the dollar higher. “We even thought it was a misprint at first so I want to see more follow through.” He also said that after four straight quarters of economic decline that the jobs figures “almost seems to good to be true.”  The US has lost about 7 million jobs since December 2007.

Yen Will Replace Dollar For Carry Trades

Against the Japanese yen the dollar was up 1.6% trading at 89.60 yen and the greenback gained 0.9% against the euro trading at $1.4939 after falling as low as $1.4913. In last week’s trading the dollar fell to a 14 year low against the yen at 84.82 yen. The yen has been pressured by the Bank of Japan’s move to inject 10 trillion yen into the financial system to relieve monetary conditions and stem deflation. The strong yen has had an adverse effect on major Japanese exporters. Many currency analysts believe the yen will replace the dollar for carry trades. The Canadian dollar affectionately known as the ‘loonie’ was bolstered by the addition of 79,000 jobs in Canada five times more than the 15,000 jobs forecast in a Reuters poll.

ECB to Withdraw Stimulus Measures

The euro had been pressured by remarks by ECB President Jean Claude Trichet who said that the ECB will move towards eliminating stimulus measures taken by the central bank to address the recession. Jean-Claude Juncker who heads a group of Euro Zone finance ministers said that the euro is ‘clearly overvalued.’ Junker made the remarks while addressing reporters at a press conference in Luxembourg.

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BOJ Announces Easing Programs

The Japanese yen fell Tuesday as the Bank of Japan announced monetary easing programs and kept rates at 0.1%. The BOJ made the decision during an emergency meeting will inject more liquidity into the Japanese financial system. The decision to hold three month finds at historic lows sparked a slight return of risk appetite putting pressure on both the yen and the US dollar. Stocks and commodities rose helping commodity linked currencies and more available information about Dubai’s debt problems helped to raise risk sentiment among investors. Stephen Gallo of Schneider FX in London stated, “The two primary funding currencies, the dollar and yen, are performing badly today versus non-quantitative easing currencies and higher-yielders. The moves by the BOJ caused a big shakeout of long yen positions, and a weaker yen has helped asset price movements elsewhere … as the weak yen to a degree — but maybe not as much as dollar — drives the risk trade.”

European Stocks Rise

The dollar vs. yen rose 0.6% to 86.90 yen after reaching 87.54 earlier in the trading session. The euro rose 1% against the yen to 130.90 yen and the Aussie and Kiwi dollars rose almost 2% against the yen. The euro rose 0.4% against the dollar trading at $1.5065 and European stocks rose 2% prompting increased risk appetite. The Aussie dollar rose almost 1% against the greenback after the Reserve Bank of Australia raised rates to 3.75%. The dollar traded at 84.82 yen late last week, the lowest since 1995 due to dollar interbank costs falling below yen interbank costs.

Strong Yen Hurting Japanese Exports

The yen’s strength has hurt exporters such as Sony and Toyota and the BOJ has said it will provide 10 trillion yen in three-month funds at a fixed rate of 0.1%. Adam Cole of RBC in London said, “The message is that the BOJ isn’t completely indifferent to currency rates, and this should at least be marginally yen- negative.” Despite the central bank’s move most experts believe that as long as US rates remain at near zero the yen will not weaken.

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Risk Aversion Dominant

Risk aversion has returned and recent big winners like the commodity linked Australian and New Zealand dollars have fallen full percentage points in currency markets. Falling stocks in the US, Europe and Asia have pared demand for risky assets. Tokyo’s Nikkei fell 0.5%on Friday and the Standard and Poor’s 500 index posted the biggest one day percentage decline in three weeks. Stuart Bennett of  Calyon stated, “Risk aversion seems to be dominating at the moment and may continue to do so. That said, there hasn’t been much by way of new information to induce a fresh wave of uncertainty.” Many investors have sold shares and bought short term treasuries to minimize losses before years end.

Bank of Japan Says Economy Improving

On Friday the dollar index DXY was up 0.6% at 75.770 .DXY, above the fifteen month low of 74.679 hit last Monday. The dollar rose 0.3% against the euro $1.4862 and against the yen the euro traded at 132.09 yen. The dollar fell 0.9% against the yen and traded at 88.88 yen. The Bank of Japan left rates at 0.1% and a bank policy meeting raised its economic assessment saying the economy is improving. Adam Cole of the Royal Bank of Canada said, “The yen won’t materially sell off until we see a rise in U.S. interest rates.” US Treasury two year note yields fell to the lowest this year as investors remain concerned that the demand for higher yielding assets has outpaced US economic growth prospects.

Trichet Warns Crisis Not Over

Markets failed to react to comments by European Central Bank President Jean-Claude Trichet who said it was too early to say that the recession is over. The Kiwi dollar fell more than 2% on Thursday and the losses were extended on Friday. Against the US dollar the Kiwi traded at $0.7256. Trading is expected to be light next week as Japanese markets close for a national holiday on Monday and US markets will close on Thursday for Thanksgiving.

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Investors Cautious

On Thursday the US dollar and the Japanese yen rose in the latest back and forth between risk appetite and risk aversion. Stock market declines sent investors in search of safe haven assets. The euro vs. yen rate dropped more than 1% and recent winners such as the commodity linked Aussie and Kiwi dollars fell. Many analysts see investors as becoming cautious in advance of the year’s end and the perception that recovery may be a long way off. Boris Schlossberg of GFT Forex stated, “We’re running out of gas as far as recovery momentum goes. People have started to take money off the table as we’re getting close to the year-end because they want to make sure they can lock in all the profits they had on the long side.”

Germany Could Face Extended Recession

An economic advisor to the German government said in an interview with Reuters Television that Germany could face a double digit recession in 2010 and 2011 as the government withdraws stimulus measures. Many investors and traders see recent economic data as not living up to expectations and predictions. Steve Barrow of Standard Bank said, “There are some indications of a rise in risk aversion - stocks have come off, and there are slight concerns that a lot of data recently has not been living up to expectations.”

Brazil and South Korea May Limit Money Flows

The euro vs. dollar rate fell 0.5% and the currency traded at $1.4884. Against the yen the dollar fell 0.7% to 88.77 yen. US stocks retreated and investors and traders were concerned by actions by the Brazilian and South Korean governments to limit hot money flows into their economies. The dollar index DXY rose 0.3% to 75.384 after hitting a fifteen month low early in the week. The Aussie dollar hit a two week low and fell 1% against the US dollar to US$0.9202. The Kiwi fell 1.9% to US$0.7319.

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Dollar Holds Recent Gains

The US dollar held onto advances in advance of the Federal Reserve meeting. Most analysts expect the Fed to keep interest rates at near zero for the near future but will be watching for language indicating possible shifts in policy. Falls in stock prices on both sides of the Atlantic boosted the dollar as risk sentiment wanes. Banking troubles in the UK ad Euro Zone caused investor concern about the health of the banking system. Shake ups at the Bank of Scotland and Lloyd’s pressured the pound which fell 0.5 percent on the day to $1.6308.

Euro Zone Banking Problems, Gold at Record Highs

In addition to bank troubles in the UK the European Commission said that bank stress tests showed that Euro Zone banks could lose up to 400 billion euros ($590.9 billion USD) in 2009-2010. Gold reached a record high of $1084.70 following news that the International Monetary Fund had sold 200 tons of gold to the India’s central bank. Most analysts do not believe the rise in gold is due to risk aversion trades. The U.S. Dollar Index .DXY gained 0.10% to 76.368.

G 20 to Meet This Weekend

The euro vs. dollar rate was down 0.56% trading at 76.368 and against the Japanese yen the dollar fell 0.03% to 90.30. Investors remain cautious in advance of a slew of economic data due this week. The US jobs report is due on Friday and the G 20 nations meet this weekend in Scotland and currencies are expected to be on the agenda. The Aussie dollar which has been a big winner in currency markets fell 1% after the Australian central bank raised rates for the second month in a row to 3.5%. Andrew Robinson of Saxo Capital Markets stated, “We have a slew of central bank meetings starting today. It’s going to be a bit uncertain and nervous, and under the circumstances a bit of range trading.”

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US Dollar at 14 Month Low Again!

After a slight reprieve last week the US dollar has once again fallen to a 14 month low. Factors cited were the outlook for interest rates and indecision on monetary policy. Lately the dollar has also been pressured by the uncertainty surrounding the dollar’s future reserve currency status. Investor perceptions of a recovering global economy pared safe haven demand and increased demand for commodity based currencies such as the Canadian and Aussie dollars. John McCarthy of ING stated, “The dollar is under pressure because interest rates here are the lowest in the western world and will remain low for the foreseeable future.”

Fed to Release Meeting Minutes Wednesday

On Wednesday the US Federal Reserve will release the minutes of its September policy meeting and investors and analysts are expected to closely scrutinize the document for hints of when the Fed may raise rates and reduce stimulus programs. Many investors believe that the US government is only paying lip service for a strong dollar policy and see little or no action to back up a strong dollar policy. John McCarthy said, “The (U.S.) administration is quiet and says nothing about it, so people feel they don’t desire to make any type of external stand on the dollar.”

Commodity Based Currencies Hit New High

Economic recovery expectations have reduced demand for safe haven assets and many believe that higher oil and gold prices indicate an increase in risk tolerance. Growth and commodity linked currencies such as the Canadian loonie and the Aussie dollar hit 14 month highs against the greenback. Gold reached a record high of $1,066.40 and oil futures rose slightly more than 1% to $74 per barrel. The rise in oil prices has helped the Canadian dollar which some believe may reach parity with the US dollar.

US Dollar Under Pressure

Many experts are upbeat about the prospects of global recovery. Michael Klawitter of Commerzbank stated, “Risk perception remains an important topic in the absence of a cyclical trend out of the United States. But I wouldn’t expect any serious impact on the risk perception picture when liquidity remains very ample, so in this environment commodity currencies should continue to outperform.”

Quick Forex Tip: Currency trading in the UK is heavily influenced by the interbank market. Currency trading UK is regulated by the FSA. Regulation is much lighter in the UK and there is often very little difference between a regulated and unregulated broker. Outside the US, most regulatory bodies addressing currency transactions provide little or no requirements for brokers and regulation is nominal at best. Despite the criticisms of the FSA they do provide a measure of consumer protection and most reputable UK forex brokers are regulated by the FSA.

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.

Quick Forex Tip: Most forex brokers offer those interested in e currency trading training courses and demo accounts. Demo accounts allow new traders to trade in real time without risking actual funds. Many experts recommend that new traders use a demo account until they feel comfortable and confident trading. These trading platforms are available from most brokers. Additionally, there are several trading platforms available for free on the internet, offering access to a wide selection of currency pairs.