G8 Positive About Economy

The weekend meeting of the G 8 nations yielded some positive viewpoints about the global economy. Finance Ministers believe the credit crisis is easing and described their respective economies in the most positive terms since the global recession began. Despite the positive tone of the meeting many participants expressed caution. Currency exchange rates were affected and on Monday the US dollar continued its rally which started on Friday. Investors took profits on high yielding currencies such as the Australian dollar and the New Zealand dollar.

Investors See Excessive Optimism

Many investors have doubts about what they see as excessive optimism about global recovery. Asian oil prices continued their slide putting pressure on commodity linked currencies. An unnamed senior trader at a Japanese bank stated, “The market began taking profits on gains in emerging market currencies as well as higher-yielding currencies before the G8 meeting, and this is continuing as many investors still have their doubts about the recent excessive optimism over an economic recovery.”

Too Soon to Withdraw Stimulus Programs

Although the G 8 meeting participants have started to consider how to withdraw the various stimulus programs in effect they also said there must be firmer signs of recovery before the stimulus programs are withdrawn completely. Although currency exchange rates were not on the G8 agenda the meeting had an affect on global currency markets. The euro to dollar rate fell 0.5% to $1.3942 after hitting a recent high of $1.41. The recent high triggered automatic sell orders from investors putting downward pressure on the euro. The euro came under further pressure after the UK Daily Telegraph reported that a top German industrial group warned that the credit crisis is getting worse in Germany.

BRIC (Brazil, Russia, India, China) Meeting Tuesday

In the near future investors will be watching the BRIC (Brazil, Russia, India, China) meeting closely. Russian Finance Minister Alexei Kudrin said in advance of the meeting that the dollar’s status as a reserve currency is unlikely to change in the near future. The statement helped the dollar exchange rate against other major currencies. The BRIC nations are not expected to discuss an alternative reserve currency at their Tuesday meeting.

Quite a bit of economic data from many sources is expected this week and is expected to contribute to already volatile forex trading.

US Auction Well Received

The dollar to euro rate rose on Wednesday after the US government sold $19 billion in 10 year notes. Investors were reassured about the US’s ability to sell long term debt to ease mounting deficits. The dollar to yen rate was also affected by the auction. The US Treasury sold the 10 year notes which have a high yield of 3.99%. The sale was part of a combined auction of $65 billion of US debt. Investors saw the auction as a test of the US government’s long term borrowing ability.

Auction ‘Dollar Positive’

The results of the auction were dollar positive. Michael Woolfolk of Bank of New York Mellon stated, “There were concerns about appetite for Treasuries. The results of this auction have put to rest those concerns for the time being and any peripheral fears about the dollar as a safe store of value have also been put aside. This is positive for the dollar overall.”

Euro’s Rise Triggers Automatic Sell Off Orders

The Euro’s rise above $1.40 triggered automatic sell off orders and put downward pressure on the euro. The euro to dollar rate fell to $1.3952 a decline of 0.7%. Investor concerns about long term economic recovery pared gains made by high yielding stocks and currencies. The dollar to yen rate rose 0.9% to 98.27 and the dollar to pound rate fell from a high of $1.6473 to $1.6276.

US Treasury to Sell $2 Trillion in Debt This Year

The US Treasury plans to sell $2 trillion in debt this year triggering investor concerns and affecting currency exchange rates. The announcement that Russia planned to reduce its purchases of US Treasuries put pressure on the dollar Tuesday. Despite concerns about rising US deficits recent auctions of US debt have been well received. Firas Askari of BMO Capital Markets stated, “The U.S. Treasury market is still the deepest and most liquid available.”

Although many traders hold a pessimistic view of the future of the dollar, recent gains are good news for the US. Many experts expect currency exchange rates to follow the lead of equities markets.

Dollar Rallies on Better Than Expected Jobs Data

The US dollar staged a rally late last week after better than expected jobs data showed that the rate of job losses in the US sharply declined in May despite the news that General Motors was closing several manufacturing facilities across the US. Currency exchange rates were also affected by speculation that the US Federal Reserve will raise rates by the end of the year. The euro was pressured downward after Standard and Poor’s downgraded Ireland’s credit rating for the second time this year.

Speculation That Fed Will Hike Rates in 2010

The dollar to euro rate gained 0.85 to $1.3855. Brian Kim of UBS AG stated, “The market is speculating that the Fed is more prepared to hike rates. The S&P’s downgrade of Ireland is also weighing on the euro.” Kim also believes that within a month the dollar to euro rate will weaken to $1.40. The euro to yen rate fell 0.9% to 136.51 from 137.81 yen. The dollar to yen exchange rate is currently 98.62.

Dollar Index Gains

The Dollar Index (DXY) which measures the dollar against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish Krona gained 1% to 81.466, the highest since May 20th. The dollar has fallen in the last three months against all the major currencies except the yen and currency exchange rates have been affected by speculation that the Fed’s purchase of $300 billion in treasuries could debase the dollar.

Pound Volatile

The pound to dollar fell on volatile trading as Prime Minister Gordon Brown’s Labour Party feel to its lowest point in almost a century. The pound fell 0.4% to $1.5913 as Labour came in third in recent national elections in Britain. Labour posted its first loss to Conservatives in Wales for the first time since 1918.

Conservatives Sweep European Elections

Currency exchange rates are bound to be affected by the conservative sweep of the European Parliament elections. Center right parties made huge gains in many Euro Zone nations and may signal new economic and monetary policies affecting global currency exchange rates in the near future.

GM Bankruptcy Causes Concerns

The yen to dollar exchange rate rose for a second day and also gained vs. the euro after the US government announced that General Motors will file for bankruptcy. The Japanese yen maintains its status as a safe haven currency as some currency experts are beginning to question the US dollar’s safe haven status. The Japanese yen rose against 13 of the 16 most traded currencies in global forex markets. Many traders see the announcement by GM to close 11 factories as a sign that the US recession is far from over.

ECB May Plan More Quantitative Easing

The euro to pound rate fell on concerns that the European Central Bank will announce plans for more quantitative easing at their June 4th meeting. The dollar index declined the most in three weeks as investors remain concerned that the US government will own a 60% stake in a bankrupt company. The Obama administration issued a statement that said the government is “a reluctant equity owner,” of GM. Currency exchange rates have been greatly affected by concerns about mounting US debt. Susumu Kato of Calyon Securities stated, “The trend is for a decline in the dollar on the deteriorating quality of U.S. government debt.”

Dollar Sell Off

The euro to dollar exchange rate gained 0.2% trading at $1.4178 after reaching a high of $1.4246, the highest since December. The pound to dollar rate rose to a seven month high of $1.6436. Other winners were the Aussie and Kiwi dollars which traded at $0.8137 and $0.6520 respectively. Brian Dolan of Forex.com said, “This is a market that is in the process of selling the dollar against everything, buying commodities, and that should continue today. The move has taken on something of a self-fulfilling quality to it now.”

Currency exchange rates for the US dollar are being driven by the perception that the worst of the recession is over and investor concerns about mounting US debt. Barring an exceptional event the rest of the week does not look good for the greenback.

FOMC Meeting Minutes Released

Wednesday’s release of the Federal Open Market Committee’s (FOMC) meeting minutes pushed the euro to its highest level against the US dollar since January. The euro to dollar exchange rate was prompted by rising stocks and the belief that the US will be the first to recover from the global recession. The dollar has declined against the euro for the last three trading sessions. At the close of Wednesday’s session the euro was trading at 1.3604.

Fed May Go Over the Present $1.75 Trillion to Purchase More Debt

The FOMC minutes indicated a willingness of the Federal Reserve to go over the $1.75 trillion already committed to purchasing mortgages and other assets. Many traders believe this move could devalue the US dollar since the Fed has to print more money to pay for the increased purchases. Currency exchange rates were affected as investors shrugged off the bad news and moved towards higher yielding and riskier investments.

Better Euro Zone Data

The euro to dollar exchange rate rose 1% to 1.3768, up from 1.3630 on Wednesday. In early forex trading the euro to dollar rate touched 1.3830, the highest since January. The euro fell slightly after a German report showed producer prices falling at the fastest rate in 22 years. Flash Manufacturing PMI and the Flash Services PMI (covering the German, French and Euro-Zone) are expected to show the manufacturing and services sectors contracting at the slowest rate in 7 months.

Japanese GDP Declines

Currency exchange rates were affected after the Japanese Cabinet Office said that Japanese GDP declined 3.5%, the most since 1955. Speculation that the US economy is far from recovering boosted demand for the yen on global currency markets. After falling as low as 94.33 the yen to dollar exchange rate rose slightly to 94.52 late Wednesday. The Bank of Japan starts a two day policy meeting on Thursday but the meeting is not expected to affect currency exchange rates. With stock markets performing well the rise in risk sentiment is expected to continue.

Euro Zone Decline Continues

Last week the risk appetite that had dominated currency markets for the previous two weeks came to an abrupt halt. Despite warnings from experts that economic optimism was premature many investors and traders adopted the ‘green shoots of recovery’ theory. The euro to dollar exchange rate posted record monthly gains and commodity based currencies such as the Canadian and Australian dollars rose. Data that showed the Euro Zone economy declining at its fastest pace ever triggered a return to risk aversion benefiting the US dollar and the Japanese Yen.

Yen Supported by Safe Haven Demand

A drop in Asian and European shares provided support for the Yen and the Dollar as investors sold riskier currencies and returned to the safe haven of the dollar and yen. The dollar index which measures the dollar’s performance against six major currencies rose 0.2 late Friday to 83.161 .DXY affecting the dollar exchange rate. The euro to dollar exchange rate fell 0.4% to $1.3436 down from a high of almost $1.37 last week.

ECB Council Member Calls For Caution

The euro dollar exchange rate was also affected last week by remarks from ECB council member Axel Weber warned against “exaggerating” recent data suggesting the economy is stabilizing. In an interview with Financial Times Deutschland Weber stated, “The crisis has yet to reach the people via job losses. Calling an end to the crisis too early is very risky. People will be disappointed and that could have an enormous impact on confidence.”

This Week to be Dominated by Equities

Stocks are expected to influence currency exchange rates throughout the coming week. Sue Trinh of RBC Capital Markets stated, “We’re in for another week dominated by equities and given the poor close of the U.S. market, there is caution about a sell-off in risk. “The VIX index known as Wall Street’s ‘fear gauge’ rose 5.6% indicating increased pessimism and affected currency exchange rates.

According to most experts currency exchange rates will follow trends in global stock markets this week.

Uneventful Week Expected

This week’s economic calendar promises to be relatively uneventful and traders expect currency exchange rates to be affected by stock market performance. French and Italian production figures are due this week and could affect the euro to dollar exchange rate. The production figures are expected to show the fourth consecutive month of double digit declines in both Euro Zone countries. Exports account for 40% of the Euro Zone’s economy and negative production figures are expected to pressure the euro.

Bernanke Expected to Speak

On Monday Federal Reserve Chairman Ben Bernanke is expected to speak about the results of US bank stress tests and Bernanke’s comments tend to affect markets and currency exchange rates. A return to risk aversion on Monday has bolstered the US dollar and the Japanese Yen as investors take their cue from equities markets.

European Shares Fall

On Monday European shares fell and US stock futures pointed to a lower open for US stock markets. This has bolstered the dollar as forex investors pull back from last week’s rise in risk appetite. The euro to dollar exchange rate has fallen 0.5% to $1.3580 after hitting a seven week high of $1.3670. The euro to yen exchange rate fell 1.4% to 132.33 after reaching a one month high of 134.81.

Risk Appetite Unsustainable

Some experts are saying that last week’s rise in risk sentiment was premature and that there are few near term events to sustain risk appetite.  Many traders expect currency exchange markets to follow stock market trends this week in the absence of significant economic data. The fading risk rally sent the Aussie dollar 0.8% lower to $0.7630 and the Kiwi dollar was down 0.3% to $0.6018 after climbing to a six month high of $0.6100.

No Significant Data Expected

Aside from Bernanke’s remarks there are no economic reports of significance due this week. Currency exchange rates and risk sentiment are most likely to be affected by stock market performance.

US Dollar Rebounds

On Tuesday the US dollar rebounded against the Euro as US stocks fell triggering a return to risk aversion. The euro to dollar rate fell as investors took profits from the Euro’s recent rise in advance of the ECB meeting scheduled for Thursday. The central bank is expected to lower rates but there is still no word whether the bank will follow the lead of the US Federal Reserve and use unconventional measures to address the ongoing recession.

Investors Waiting For Stress Tests Results

Investors are also waiting for the results of US bank stress tests causing fluctuations in the euro to dollar exchange rate. Various news agencies have reported that the Bank of America may need additional capital of $34 billion dollars. The stress tests are expected to show that 10 out of the 19 major US banks will need additional capital raising investor concerns about the health of US banks.

Many “Overly Optimistic” Say Some Experts

Some economists believe that recent positive manufacturing data has caused many to become “overly optimistic” about economic recovery. This optimism has affected currency exchange rates causing investors to seek higher yielding assets. Many forex traders remain cautious in advance of the stress tests. Michael Woolfolk of Mellon in New York stated, “The stress test will have some negative implications, Despite the fact that we’ve had some good numbers recently…we have conditions which I think really call for some caution.”

Bernanke Says Recovery to be Slow

Optimism has boosted stock markets in recent weeks reducing demand for safe haven assets and affecting US dollar exchange rates. Most traders expect recovery to be slow and Federal Reserve Chairman Ben Bernanke said that recovery would be slow and the jobless rate will continue to rise. The results of the ECB meeting will undoubtedly affect global currency exchange rates.

Risk Appetite Pressures US Dollar

Better than expected data from the US triggered a rise in risk sentiment among currency traders putting pressure on the US dollar and the Japanese Yen which are traditionally seen as safe haven currencies during troubled times. The euro to dollar rate was affected as the dollar fell against the euro for the fourth straight trading session. The yen is at a two week low against both the dollar and the euro.

Investors Wait For US bank Stress Test Results

Currency trading is expected to be light in advance of the May Day holiday celebrated in both Europe and Asia. Many investors remain cautious in advance of Monday’s results of US bank stress tests. The Australian and New Zealand dollars were the biggest winners in forex markets. US stocks rose on Friday also affecting currency exchange rates globally.

US Manufacturing Increases

Data showing a rise in US manufacturing and increased consumer confidence also affected both the euro to dollar and yen to dollar exchange rates. Wednesday’s positive statements by the US Federal Reserve raised investor confidence. The Fed will leave rates at 0.00% to 0.25% and said that economic contraction is slowing. The Fed also noted problems with credit markets which are having an adverse effect on business.

Fridays Exchange Rates

The euro to dollar exchange rate rose 0.3% to $1.3258 and the euro to yen rate reached 132.33 up 1.2% from Thursday. The dollar to yen exchange rate rose 0.7% to 99.46 after reaching a two week high of 99.58. Both the Aussie and Kiwi dollars made significant gains against the US dollar. The Australian dollar rose 0.7% to $0.7304 while the Kiwi rose 0.8% trading at $0.5693.

Pandemic Concerns

Also affecting currency exchange rates are concerns about the health of the US banking sector and the results of US bank stress tests are due Monday. Concerns about the possibility of a flu pandemic affected currency exchange rates earlier in the week. Some analysts believe that negative results of US bank stress tests could trigger a return to risk aversion.

Rising Risk Appetite

The euro rose against the US dollar in Wednesday’s forex trading as rising US stocks triggered a rise in risk sentiment among investors. An expected Federal Reserve policy statement is expected this week and is bound to affect the euro to dollar exchange rate. Risk appetite has been limited by a report that showed worse than expected US economic growth.

US Figures Worse Than Expected

Analysts’ had predicted a 4.9% decline in US economic contraction but the report showed a larger than expected 6.1% decline which affected the euro to dollar rate. Most investors have been watching the Fed closely for signs of more quantitative easing. The Fed policy statement is due on Wednesday at 2:15 p.m. well before market closing time.

Sentiment in Euro Zone Improves

The euro to dollar rate was also affected by a European Commission survey which showed that economic sentiment in the Euro Zone improved more than expected. The euro to dollar rate was up 0.7% and the euro traded at $1.3240. Investors were taking advantage of the forex opportunity offered by higher yielding currencies. The Aussie dollar rose 1.6% and the New Zealand dollar rose 2.2% against the US dollar.

Pandemic Fears Affecting Currency Markets

Earlier in the week concerns about a possible swine flu pandemic caused investors to seek safe havens affecting the euro to dollar and euro to Yen exchange rates. Investors were also concerned about the health of US banks which prompted safe haven buying affecting the euro to dollar rates earlier in the week. Results from the ‘stress tests’ of 19 major US banks are due next week and are expected to affect global currency trading.

Fed Announcement Due Today

While risk sentiment has increased investors are being cautious in advance of the expected results of the Fed meeting. Since the Fed’s rates are hovering near zero investors expect an increase in further quantitative easing. No matter what the Fed announces it is bound to affect currency exchange rates.