Financial Times Says US Credit Rating in Danger

All indications are that this week will not be a good one for the US dollar. It would appear that most forex traders and investors are subscribing to the ‘green shoots of recovery’ theory. A media report that said the credit rating of the US is threatened by huge deficits also put the greenback under pressure. Standard and Poor’s said that the costs of propping up government enterprises like Fannie Mae and Freddie Mac could cost the US 10% of GDP threatening the US’s triple A credit rating.

Markets in Buoyant Mood

The buoyant mood in financial and stock markets has also affected currency exchange rates globally. On Tuesday the euro to dollar rate rose 0.9% to a seven week high of $1.3695. The Pound was up 1.4% to $1.5336, it’s highest since January. The pound was bolstered by positive retail sales data, and stronger housing and industrial production figures.

Aussie and Kiwi Dollars Benefit From Risk Appetite

Changing currency exchange rates have also benefited both the Aussie and Kiwi dollars. The Aussie dollar rose 0.9% to $0.7647 while the Kiwi dollar rose 0.6% to $0.6049. The euro to yen rate rose 0.4% to 132.93 and the dollar to yen rate fell 0.4% to 97.18. The Australian dollar rose despite the country’s rising deficit and unemployment. A few traders are urging caution saying that economic figures are “less catastrophic” and do not point to global recovery.

Last Week’s Rally Extended

It would appear that last week’s rally in risk appetite has been extended into this week’s currency trading. US retail sales and industrial figures are expected this week and it remains to be seen how each set of data will affect currency exchange rates. Although some experts are advising caution it would appear that the ‘green shoots of recovery’ theory will dominate currency exchange markets.

Euro Pares Recent Gains

The euro held last week’s gains through the weekend but fell on Monday after European stock markets were down and stock futures pointed to a low opening on Wall Street. Last week’s rally in risk appetite saw the euro reaching multi month highs. Investors brushed off the results of US bank stress tests and the rally in risk appetite continues well into the weekend.

Currency Markets to Follow Stock Markets

Over the weekend the euro to dollar rate held steady at $1.3630 after reaching a seven week high of $1.3660. The euro to yen exchange rate also held steady at 134.21 after hitting a high of 134.80. Many experts doubt that the rise in risk sentiment is sustainable. Sue Trinh of RBC Capital Markets stated, “There seems to a sea-change at work in terms of general sentiment. It will be an interesting week to see how sustainable that is because there’s nothing really in terms of event risk.” She also said that currency exchange rates would look to equity markets for momentum.

Investors Turn Cautious

On Monday investors turned cautious as European shares were down 1.3% and banking shares were down almost twice as much pointing to a lower start on US stock markets. Many investors now feel that last week’s momentum is not sustainable and that the rise in risk appetite was premature. The realization that the recession is still with us and is likely to continue into the foreseeable future has affected investor sentiment and currency exchange rates.

No Significant Data on Tap

No significant economic data is expected this week although Fed Chairman Bernanke’s remarks on Monday could affect markets and currency exchange rates. Most currency specialists expect currency exchange markets to be mainly affected by stock and commodity market performance.

ECB Expected to Cut Rates

Investors are awaiting the results of Thursday’s meeting of the European Central Bank. The central bank is expected to cut rates putting pressure on the euro to dollar exchange rate. So far there is no indication that the ECB will adopt measures similar to those of the US Federal Reserve. Most analysts say that a rate cut from 1.25% to 1% is a certainty and may have a negative impact on the euro to dollar rate.

Risk Sentiment Affects Euro to Dollar Rate

Investors have long known that low interest rates can cause a currency to lose value and any rate cut is bound to adversely affect the euro to dollar rate. Risk sentiment, which has been changing daily, has also affected the euro to dollar exchange rate.

Bernanke Says Recovery to be Slow

On Tuesday U.S. Federal Reserve Chairman Ben Bernanke told congress that the US economy should start growing later in the year but warned that economic activity is likely to be limited companies will be slow to hire new workers. Late Tuesday the euro to dollar rate fell from $1.3313 to $1.3250.

BOA May Need $34 Billion

Concerns about US banks increased after it was revealed that the Bank of America may need $34 billion dollars to cover a capital shortfall. Investors are also awaiting the US job report on Friday which has affected risk sentiment and the euro to dollar rate. Recent economic data has been somewhat positive and many believe that the worst of the recession is over. Data showing signs of recovery has limited losses by the euro which usually benefits from rising risk appetite.

Improved Manufacturing Data

Improved US jobs data coupled with a recovering housing market and improved manufacturing data from China, Europe, and India have all caused increased risk appetite affecting currency exchange rates. Speaking of the job figures Dan Cook of IG Markets in Chicago, said “With everything dependent on the labor market, this was a fantastic indication that maybe we are seeing a turnaround.”

With so many important meetings taking place this week investors will have a full plate of data to sort through. Currency markets have been taking their cue from stock markets and this trend is expected to continue.

Yen Drops vs. Dollar

The Japanese Yen fell to a two week low against the dollar as investors see signs of economic recovery. Currency exchange rates are affected by changes in risk sentiment and recent signs of recovery have put pressure on safe haven currencies such as the US dollar and Yen.

May Day Weekend Trading Thin

Currency exchange rates were also affected by the May Day holiday and trading is expected to be limited as Asia and Europe celebrate the May Day holiday. The dollar to yen rate was also affected by data showing a four year high in unemployment and a second round of deflation. In Asia Chinese manufacturing increased and South Korea shows signs of recovery.

Confidence Spreading

The Japanese Nikkei exchange was trading 4% higher affecting the dollar to yen exchange rate. The current dollar to yen rate stands at 99.16 while the euro to yen exchange rate is 131.06. Toru Umemoto of Barclays Capital in Tokyo stated, “This confidence is spreading in the equity markets and risk appetite is growing more and more. As a result the yen is sold broadly. Investors are seeking a growth gap and a rate gap and as a result the yen is a funding currency.”

Risk Appetite Vulnerable

Risk appetite has been bolstered by economic data from the US that showed higher US manufacturing and declining unemployment. The news of US auto manufacturer Chrysler’s bankruptcy filing failed to have any affect on currency exchange rates.  Risk appetite is seen as vulnerable due to ongoing concerns over a possible flu pandemic.

Investors Wait For Stress Tests Results From US

Currency trading is expected to be light over the holiday weekend and investors are wary in advance of the results of US bank ‘stress tests’ due Monday. If US banks fail the stress tests and need more capital risk appetite could take a drubbing as currency traders scramble for safe havens.

Flu Pandemic Raises Risk Aversion

Monday’s trading saw investors return to the safe haven of the dollar after news of a possible influenza pandemic sent investors scrambling for safe havens. The news affected global currency exchange rates sending the dollar up against the euro. Tuesday’s forex trading saw a slight rise in risk sentiment affecting the euro to dollar exchange rate.

Improvement in US Housing Market

Data released in the US showed the decline of US home prices slowing prompting many to believe that the worst of the US housing crisis is over. Concerns about the health of the US banking industry raised concerns among investors limiting gains in the euro to dollar exchange rate. US bank regulators told CitiGroup and the Bank of America they needed more capital following ‘stress tests’ of US banks.

Flu Pandemic Could Cost $3 Trillion WHO Warns

Both news stories frightened investors and affected currency exchange rates. James Hughes of CMC Markets stated, “The flu story and the story on Citi and Bank of America have spooked the whole market.” In Mexico 150 people have died from the current strain of flu and the World Bank estimates that a global pandemic would cost $3 trillion dollars and reduce global GDP by 5%. Several countries have reported cases of the same strain of flu that has killed so many in Mexico.

US Consumer Confidence Higher

Several other factors are affecting European currency exchange rates. Profits at Spain’s Spain’s BBVA declined and businesses at Deutsche Bank were strained. German inflation rose 0.7% while French consumer confidence rose slightly. While the influenza story and the US banks report caused a decline in European stock markets US stocks recovered  after data pointed to a larger than expected rise in U.S. consumer confidence.

Busy Week Ahead

This week is expected to be an active one in currency exchanges. Many reports from several countries are expected to bring news bound to affect currency exchange rates. Lately risk sentiment seems to change daily and this week will be no exception.