Investor Optimism Pressures Dollar
Last week the US dollar hit a five month low and is presently at its lowest point this year. Optimism among investors has pressured the dollar downward as many investors believe that the worst of the global recession is over. Also pressuring the dollar and affecting currency exchange rates in general are concerns about mounting US deficits and how the US government will finance its debt. Last week the S Korean state pension agency indicated the will reduce their purchase of US government bonds due to deficit concerns.
Industrial Production Data Boosts Investor Optimism
Recent industrial production data from the Euro Zone, UK, and China boosted investor optimism and affected currency exchange rates. The Euro Zone PMI manufacturing index rose to a seven month high of 40.7 in May. The PMI manufacturing index in the UK was stronger than expected boosting the pound to dollar exchange rate. The announcement of General Motors bankruptcy removed all doubt about the struggling US auto industry and boosted risk sentiment.
Dollar Gains on Yen
The only piece of good news for the struggling US dollar was a 1.1% gain in the dollar to yen rate to 96.31 yen. The pound to dollar rate rose to a seven month high of $1.6436 but the big winners were the commodity based Australian and New Zealand dollars. Both the Aussie and Kiwi dollars reached eight month highs of $0.8137 and $0.6520 respectively.
Dollar on Track For Biggest Monthly Decline Since 1985
Last week saw a massive sell off of dollar denominated assets as rising risk sentiment sent investors in search of riskier and higher yielding investments and currencies. The dollar is now on track for its biggest monthly decline since 1985. Kathy Lien of GFT Forex said, “We’re probably looking forward to more positive data from the U.S. economy, which will ease safe-haven flows and continue to drive the dollar lower.”
Most currency strategists expect the downward trend for the dollar to continue. Currency exchange rates could be affected by this weeks meeting of several central banks in the Euro Zone and the UK.
