Aussie ad Kiwi Fall Sharply
The US dollar and the yen held onto last week’s gains as investors trimmed risky positions and sought safe haven assets. Commodity linked currencies such as the Aussie and Kiwi dollars fell sharply in global currency markets. Falling US, European and Asian stocks also sent investors in search of safe haven currencies like the dollar and yen. The dollar was also helped by banks putting funds into US government bonds. The high yielding Aussie and Kiwi dollars have been popular against the lower yielding US dollar and yen but both the Aussie and Kiwi were down 1.5% for the week as investors pulled back on long positions in advance of a three day holiday in Japan and the Thanksgiving holiday in the US. Andrew Robinson of Saxo Bank in Singapore stated, “It’s a smaller version of what we saw yesterday. The risk currencies are still generally on the weak side but there’s been very little activity in the markets. There are still some buyers on dips on the risk currencies but not to the extent there were two or three weeks ago.”
Stock Declines Spur Safe Haven Demad
Declines in equity and commodity markets spurred safe haven demand affecting the dollar. The US dollar is seen as being inversely correlated with commodities such as oil, gold and other raw materials which are priced in dollars and are seen as hard assets and alternative currencies. Recent economic data has been disappointing and many investors believe that last week’s rally in high yielding assets was overdone. Vassili Serebriakov of Wells Fargo said, “It’s probably a combination of the notion that the global economic data has been going through somewhat of a soft patch recently and the fact that the year-end is approaching.”
Trichet Says Crisis Not Over, Warns Banks
Market reaction was muted to comments by European Central Bank President Jean Claude Trichet who said that it is too early to declare the recession is over. He also said that exceptional measures would have to be phased out gradually and said it is essential that banks become self reliant and not dependent on government measures meant to stabilize the banking system. At the 19th Frankfurt European Banking Congress Trichet stated, “The mood in the financial system is one of relief. But as of today, it is too early to declare the crisis over.”
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Investors Take Dollar Profits
The dollar fell against major currencies as investors and forex traders took profits on the dollar’s recent rally and concerns that US interest rates would remain near zero well into 2010. Reports showing a higher than expected rise in US inflation and decline in home construction put downward pressure on the dollar. The euro hit session highs Wednesday as a statement from a US Federal reserve official said that the central bank would tighten emergency asset purchase programs instead of raising interest rates. The euro hit $1.4977 after US inflation and housing reports were released. Federal Reserve Bank of St. Louis President James Bullard said that US policymakers may not start to raise rates until some time in 2012.
The Continuing Dollar Decline
Many traders predict a continuing dollar decline and investors are concerned about rising US debt and deficits. Sandeep Malhotra, of Clariden Leu in Zurich stated in an interview wit Bloomberg news, “Over the long term, the dollar is on a continuous decline. Given the constraints U.S. consumers are going to face going forward, given the huge debt burdens, we believe the structural divergence in growth will continue to play out.” The dollar vs. euro rate fell 0.4% to $1.4936 and against the Japanese yen the euro rose 0.7% to 133.66 The US dollar traded at 89.45 up 0.2%.
Fed Rates to Remain Near Zero
On Monday Federal Reserve Chairman Ben Bernanke said that a weak labor market and a decline in bank lending will slow US recovery and will make keeping interest rates low necessary for recovery to take place. Without a rise in interest rates the dollar will continue to be used for carry trades where investors purchase higher yielding assets and currencies with funds borrowed in countries with low rates. Antje Praefcke of Commerzbank said “Without initial rate-rise expectations, we consider a sustainable reversal in euro-dollar to be unlikely, as the dollar is likely to remain attractive for carry trades due to its low interest rates.”
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Dollar Falls Against Euro, Pound
On Friday the US dollar fell against the euro as traders and investors speculated that the US Federal Reserve would keep interest rates low for an ‘extended period.’ The pound vs. dollar rate rose for the second straight week after the Bank of England expanded its debt purchase program less than economists had predicted. This pared concerns that policy makers would fold the market with pounds. Disappointing US employment figures pressured the dollar and prompted speculation about US interest rates. Alan Ruskin of RBS Securities stated, “The Fed is firmly on hold. Do you really want to buy the dollar on weak U.S. data? It’s not obvious. On balance, the trading environment remains dollar-negative.”
S African Rand and Gold Big Winners
The greenback fell 0.9% against the euro trading at $1.4847 and fell 0.2% against the yen to 89.88. Gold futures hit a record $1,101.90 as investors hedged against a weak dollar. The South African Rand was a big winner against the dollar and rose 3.7% to 7.5357. S Africa is the third largest gold producer in the world and record gold prices pushed the rand to its biggest rally since July 2009. US employers cut 190,000 jobs in October and the US unemployment rate rose to 10.2%. Third quarter results showed the European economy grew by 0.5% and the world’s largest currency trader Deutsche Bank AG predicted the dollar will fall to $1.55 vs. the euro by the end of 2009.
G 20 Urges Governments to Leave Stimulus Measures in Place
The G 20 members urged member nations to keep stimulus measures in place until recovery is assured. The group noted that recovery has been uneven and committed to a mutual assessment of their economies designed to set national and regional policies by January 201. In a communiqué the G 20 stated, “Economic and financial conditions have improved following our coordinated response to the crisis. However, recovery is uneven and remains dependent on policy support. To restore the global economy and financial system to health, we agreed to maintain support for the recovery until it is assured.”
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Rise in Risk Appetite
The US dollar continued its losses against the euro on Monday. The euro gained a high of $1.4821 and traded at $1.4812 in later trading. Positive data from the US housing and construction sector triggered a rise in risk appetite among investors and put downward pressure on the dollar and the Japanese yen. US stocks rose along with gold and oil prices lifting risk sentiment and benefited commodity based currencies such as the Australian and New Zealand dollars. Nick Bennenbroek of Wells Fargo stated, “I think we’re clearly seeing some appetite for risk today. The gains in U.S. equities in particular are seeing the dollar give up some ground.”
Dollar Seen as Barometer of Risk Appetite
During the current recession the US dollar has been seen as a barometer of risk sentiment among traders and investors. The dollar rises on bad economic news as investors seek the safe haven of the dollar and the dollar falls when the news is good and investors seek riskier assets. The dollar vs. yen rate rose 0.4% to 90.50 yen and the euro gained 1.1% against the yen trading at 134.12 yen.
Economic Expansion
Good news from the US sent risk appetite higher. Manufacturing activity in the US rose to its highest in three and one half years and pending home sales also rose in September. Thomas Nyheim of Christiana Bank & Trust Co. said, “All the numbers show stabilization and the start of some expansion. That’s a continuation of what we’ve been seeing for the past couple of months.”
Busy Week Ahead
Currency markets will be presented with a slew of economic data this week. Investors remain cautious in advance of monetary policy meetings in the US, the Euro Zone, Australia and the United Kingdom. In addition the US jobs report is due on Friday and the G 20 group of nations meets next weekend. In a note to investors UBS strategists wrote, “How this week evolves could have major implications for FX markets and the global economy, as investors and policy makers alike seek to establish their strategies for next year.”
Quick Forex Tip: Political conditions play a major role in global currency trading. Political instability can cause a currency to lose value. Recently political problems and deficit concerns in Greece caused the euro to fall in global currency trading centers. Market psychology although difficult to define can also affect market perceptions and can either help or pressure currencies.
