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.

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.