Dollar Gains on US Data

The US dollar rose against most major currencies on Friday bolstered by US data indicating a rise in manufacturing and stable consumer price inflation. Ongoing concerns about the Fiscal health of Greece pressured the euro despite the government’s promises to raise taxes and cut spending. Dan Cook of IG Markets in Chicago stated, “What is really crushing the euro is additional concern about the serviceability of the massive amount of debt rung up in Greece.”  Euro zone finance ministers said that the Greek government misled them about the size of the nation’s budget deficits and indicated a willingness to impose sanctions if needed.  The euro fell 0.9% vs. the greenback on Friday trading at $1.4373. Greece experienced its first recession in 16 years in 2009 and is widely seen as the Euro Zone’s most indebted member. Debt accounts for 120% of Greece’s Gross Domestic Product.

Dollar on Track For Further Gains

Despite mediocre US economic data some traders believe the dollar is on track for further gains. Michael Woolfolk of BNY Mellon in New York said, “It’s not a surprise to see better-than-expected manufacturing data. A point of this recovery, outside of fiscal stimulus, is that the U.S. manufacturing sector is already on the rebound.” The euro had fallen in Asian trading on rumors, later proved false, that German Chancellor Angela Merkel would resign. Last Thursday European Central Bank President Jean-Claude Trichet said that Greece would receive no special treatment and said that recovery in the Euro Zone was uneven.

New US Data Due This Week

US data due this week will likely be a focus of currency markets. Data on U.S. net capital flows, producer prices, housing starts, and initial jobless claims will be released this week and investors will be searching for clues about the direction of the US economy. Tim Evans of Lind-Waldock stated, “The markets will possibly be nervous with U.S. data that’s not favorable. If those numbers come in bearish, then that would further discount the dollar.”

Austria’s Largest Cooperative Bank on Watchlist

Austrian banking woes have further pressured the euro in currency markets. Austria nationalized Hypo Alpe-Adria Bank International AG and the Austrian press reported that the Austrian central bank and its financial market regulator have put Oesterreichische Volksbanken have put the country’s largest cooperative bank on a watchlist. A spokesman for the bank said it was not at risk of nationalization and that the press reports were inaccurate. Recently the US dollar has risen on positive US jobs and economic data. Camilla Sutton of the Bank of Nova Scotia stated, “What we are seeing recently is the improvement in some important U.S. data and rising sovereign risk in the euro zone. Both provide a bid tone to the U.S. dollar.”

Dollar Gains on Industrial Production Data

The dollar gained 1% on the euro trading at $1.4513. The dollar gained 1.6% on the yen and traded at 89.95. The yen fell 0.4% against the euro to and fell 0.5% against the pound to 89.41 U.K. pence. US industrial production increased 0.8% in November but a report from New York showed decreased industrial production during the same period showing the US economy is still struggling. Sebastien Galy of BNP Paribas SA said, “The data was positive for the dollar. It’s much safer to be short the yen, not the dollar.”

Greek Fiscal Problems Add to Euro’s Woes

Risk sentiment rose after Abu Dhabi announces a $10 billion dollar bailout for Dubai erasing previous debt concerns. Greek fiscal problems continue adding to Austria’s banking woes and sparking concerns about Euro Zone recovery. Investors are watching the ongoing Federal Reserve meeting for signs that the Fed may withdraw its stimulus programs earlier than expected. The Fed’s low rates have pressured the greenback throughout 2009 and although the dollar is now higher against most major currencies the DXY is %% lower this year. Since the release of the last US non farm payrolls report investors have been speculating that the Fed may raise rates sooner than expected.

UAE Central Bank to Provide Emergency Liquidity

Investors have calmed down since Dubai World requested a six month moratorium on debt payments. The actions by he UAE Central Bank to provide emergency liquidity to Dubai calmed investor fears. The dollar erased last weeks gains and continues its long term decline as risk aversion eased. The dollar fell against most major world currencies as better than expected pending home sales and actions by Dubai World raised risk sentiment. Sebastien Galy of BNP Paribas SA stated, “The Dubai effect is fading. Equities have had time to rally, and the foreign-exchange market is basically following.” During the current recession currencies often follow the lead of stock and commodity markets.

Dubai World Begins Talks With Banks

The Standard & Poor’s 500 Index rose 1.3% and European stocks rose putting downward pressure on safe haven currencies such as the US dollar and the yen. Dubai World announced it has begun talks with banks to restructure $26 billion in debt and is seeking to put off payments of half of its $59 billion debt easing default fears among investors. The euro gained on the dollar after London-based Markit Economics reported that European manufacturing grew for the second straight month. The Australian dollar rose 0.6% to 92.14 U.S. after the Reserve Bank of Australia announced it would raise rates to 3.75%.

Japanese Government to Stem Yen’s Appreciation

Japan’s National Strategy Minister Kan said that the government has agreed to step in and try to stem the yen’s appreciation which is hurting exporters like industrial giants Sony and Toyota. Investors will be watching the US jobs report due December 3rd and job losses are expected to be around 480,000 up from last month’s job losses of 466,000. The report will also contain third quarter productivity and labor costs. On December 4th the non farm payrolls and unemployment report will be released and unemployment is expected to remain at 10.2% pointing to a prolonged recovery.

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.”

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.”