Rising Risk Appetite Pressures Dollar

A smaller than expected rise in US inflation boosted hopes that recovery is underway and put downward pressure on the US dollar. Rising risk appetite has pressured the dollar for the past few weeks as investors sell the dollar in favor of higher yielding currencies. Brian Dolan of Forex.com stated, “We’re seeing dollar weakness because the idea is that inflation is not pretty evident right now and that is seen as a positive in terms of the growth outlook and risk appetite.”

Markets Due For Correction

Mixed economic data from the US in recent weeks has left forex traders unsure how to trade the US dollar. The euro to dollar rate fell by 0.1% to $1.3828. The Australian dollar and the euro have been rising since March as signs of recovery emerged paring safe haven demand which traditionally helps the dollar. Some analysts advise caution and believe that hopes of recovery are premature and equity and currency markets need a pause or correction so investors and traders can assess global recovery.

BRIC Summit Fails to Address Dollar

Despite remarks by Russia’s president questioning the dollar’s reserve status this week’s meeting of BRIC (Brazil, Russia, India, and China) nations the group issued no statement regarding the dollar’s reserve status. The group of nations is demanding greater say in the world’s financial system. The remarks by the Russian president pressured the dollar in Tuesday’s treading and affected currency exchange rates. Masafumi Yamamoto of Royal Bank of Scotland in Tokyo stated, “At the end there was no strong comment to play down the role of the dollar. The global financial markets are in correction mode.”

Investors Unwinding Safe Haven Positions

The euro rose 0.2% to $1.3860 after heading for a monthly low of $1.3747. The euro has gained 11% against the dollar since March and hit a yearly high of $1.4339 this month. The dollar has fallen against major currencies as investors unwind safe haven positions in favor of higher yielding assets.

Risk appetite has returned as equity markets rallied for the fifth straight day. As usual, the return to risk appetite brought new forex investment opportunities for forex brokers. The Euro rose to $1.30, its highest in a month. The troubled British Pound also rose on Monday’s trading.

The rise of the Euro provided many forex brokers with forex opportunities that the currency has been unable to provide through most of the global recession. A group of G 20 finance ministers pledged to double the resources available to emerging markets which also raised investor sentiment. Currency markets are taking their cue from equity markets, raising risk sentiment, resulting in many forex investment opportunities. Dan Cook of IGM Markets stated, “The equity market gains are really feeding risk appetite. But while we’ve had a good run for a few days, there’s still not much good news, so we’re vulnerable to a reversal.”

Throughout the recession risk aversion has been dominant and safe haven buying has limited forex opportunity is the past. Despite the continuous stream of bad economic news some forex brokers remain upbeat and some believe that the recession is beginning to turn around. Fed Chairman Ben Bernanke said he expects the recession to continue for the rest of 2009. He also said that stabilization of the banking sector is essential before recovery can take place.

The Japanese Yen which has provided forex opportunity in the past is under pressure and Japanese economic data keeps getting worse. The Bank of Japan meets this week and is considering the purchase of long-dated government bonds. Forex brokers will be watching the Bank’s actions closely.

The last two weeks has seen a rise in investor risk sentiment and new forex opportunities. Many forex brokers advise caution and Dan Cook of IGM Markets states the obvious, “But while we’ve had a good run for a few days, there’s still not much good news, so we’re vulnerable to a reversal.”