Dollar’s Prestige Falls

Since the current global recession began in 2008 the US dollar has not only fallen in value but has also suffered a decline in prestige. Many nations are seriously discussing replacing the US dollar as a reserve currency. While the dollar declines against most major currencies China and other nations with emerging economies are calling for an end to the greenback’s dominance in global trade. Venezuelan President Hugo Chavez, no friend of the United States, stated Saturday that Venezuela, Russia and Iran have proposed replacing the dollar as the currency used for the oil business. Chavez stated, “We’ve been talking about this in OPEC. Venezuela agrees and there are other countries, such as Iran and Russia that have also proposed this idea.”

China’s Currency Undervalued

China has joined other nations and is proposing replacing the US dollar with a basket of currencies. Many Middle East nations involved in the oil trade support the idea. Instituting a new reserve currency would pose economic, diplomatic and economic challenges which would likely take years to resolve. China has undervalued their currency since 1995 making their products cheap in the US but at the same time putting US products out of the reach of Chinese consumers.

Concerns About US Debt

China enjoys a huge trade surplus with the US that creates growth and millions of jobs in China. Unfortunately that same trade surplus creates huge deficits and unemployment in the US. Massive US deficits caused by the financial meltdown and the bailouts have put downward pressure on the dollar in currency markets. Chinese officials have expressed concerns about rising US debt.

S American Nations Call For Dollar to be Replaced

At a meeting of Bolivarian Alternative for the Americas (ALBA) participating nations announced plans to create a single currency which would replace the US dollar. Participating nations include Bolivia, Cuba, Ecuador, Nicaragua, and Venezuela. A Russian delegation also attended the meeting. Russia has been in the forefront of the move to replace the US dollar as a global reserve currency. At the present time the role of the US dollar as a reserve currency seems relatively secure but the growing movement to replace the dollar leaves the currency’s future in doubt.

Dollar At 4 Month High vs Yen

The US dollar rose to a four month high against the Japanese Yen as concerns about the Japanese economy and possible political instability limited forex opportunities provided by the Yen. More bad news is expected from the United States as Friday’s Non Farm Payroll report is expected to show job losses in excess of 697,000 jobs in February. The US housing market remains troubled and one report said that 1 in 12 homeowners was in foreclosure.

Investors Seek Higher Yielding Currencies

Wall Street rallied on Wednesday causing the dollar to pare earlier gains against the British Pound and the Euro. Many investors took advantage of the forex opportunities offered by higher yielding currencies such as the Aussie dollar. Most economists believe that the worst of the economic crisis is far from over which is expected to bolster the US dollar in the near future. Michael Woolfolk of The Bank of New York-Mellon stated, “There’s been profit taking on long dollar positions, not unusual ahead of large events, but this shouldn’t be mistaken for a reversal in the longer-term dollar rally.”

Risk Appetite Returns

The Euro traded at $1.2550 and the British Pound traded at $1.4110, while the dollar traded at $1.4110 against the Yen. Investors were dumping the Yen amid fears of a deepening recession and possible political instability in Japan. The slight return to risk appetite provided forex investment opportunities for traders. This news is expected to boost the dollar in the near future. Chris Turner on ING stated, “The markets have a view that Asia is going to perform just as badly maybe as Europe and the U.S. this year and there’s a view that dollar Asia en-masse should go higher.”

Dollar Could Break 100 vs Yen

Many analysts believe that the US dollar could reach above 100 Yen within the next two days. Boris Schlossberg of GFT Forex stated, “When the market approaches a major psychological level, it’s hard to prevent it from breaking, and that’s why I think we’ll see the dollar break 100 yen over the next session or two.”

Good News From China

China announced a stimulus package designed to benefit infrastructure and manufacturing. China also announced three straight months of growth. Markets reacted and forex opportunities increased for traders and investors. Forex traders will be watching the ECB closely for any signs of monetary policy beyond expected rate cuts.

The slight return to risk appetite is bound to be beneficial to investors in both equity and forex markets. Even the slightest return to risk appetite means more forex opportunity fore investors.