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.

Dismal Euro Zone Figures

The euro slid further on Friday after dismal industrial output figures caused investor concerns about the Euro Zone’s economy. Earlier in the week the dollar to euro rate rose as the Euro’s rise above $1.41 triggered automatic sell off orders that put downward pressure on the currency. Investors are also speculating about the possibility of a rise in US rates. Investors also waited for the results of the G8 meeting.

European Shares Decline

A decline in European shares and oil prices also affected the euro to dollar rate in currency markets and triggered safe haven buying which benefited the dollar. Earlier in the week better than expected US payroll data prompted a rise in risk appetite putting downward pressure on the dollar.

Investors Watching G 8

Investors are watching the G8 meeting closely and any statement from the group is bound to affect global currency exchange rates. Currencies are not expected to be a high priority at the G8 meeting and many expect the finance ministers to focus on global recovery which may raise demand for higher yielding assets. Dag Muller of SEB in Stockholm stated, “If you think the dollar is tightly linked to risk appetite, then this would be dollar negative.”

US Auction Dollar Positive

Many currency experts believe that the well received auction of US 30 year Treasuries was dollar positive. The auction helped to convince investors that demand for US debt is still strong. Euro Zone industrial production fell 21.6% from last year, a record drop. Analysts had expected a decline of 20.2%. The figures had a negative effect on the euro to dollar rate. Maurice Pomery of Strategic Alpha in London stated, “I’m not surprised the figures are poor. The euro zone economy will suffer, it will suffer more than the rest of the world, ergo my view that the euro will underperform for quite some time.”

S&P Downgrades Ireland for the Second Time This Year

The euro took a hit on Monday after Standard & Poor’s downgraded Ireland’s credit rating for the second time. The downgrade was the second in three months for Ireland and the move put downward pressure on the euro. The US dollar, which rallied last Friday, was helped by the downgrade and the dollar to euro rate was last down 0.4% at $1.3910. Marc Chandler of Brown Brothers Harriman stated, “The immediate reaction (to the downgrade) was to take the euro lower, which in any event was trading heavily.”

Better Than Expected US Jobs Data

The greenback extended last weeks gains as better than expected US jobs data and rising treasury yields affected currency exchange rates. The jobs data caused many to speculate that the Federal Reserve may raise rates early next year. The euro to dollar exchange rate fell as low as $1.3806, and the euro to yen rate fell 0.8% to 136.79 yen. Geraldine Concagh of AIB Group Treasury in Dublin stated, “The euro was under pressure after last week’s dollar bounce and the downgrade puts further pressure on it now.”

DXY Highest Since May 20th

The Dollar Index or DXY was at its highest since May 20th. Last Friday the DXY posted its best performance since last November. The Pound to dollar rate was up by 0.5% to $1.6068 but trading has been volatile due to political uncertainty about the future of Prime Minister Gordon Brown’s Labour Party. Support for Labour is the lowest in a century.

US Economy Improving

In addition to Ireland’s credit downgrade the dollar has been helped by investor perception that the US economy is improving despite the bankruptcy of auto giant General Motors. Although US unemployment is at its highest in 26 years the pace of US job losses has drastically slowed and investors see this as a sure sign the recession is easing.

Conservatives Score Big in European Elections

Currency exchange rates are expected to be affected by a resounding victory of conservative parties in Europe in recently held elections. Any shift in policies by the new conservative majority could easily affect currency exchange rates.

Investor Optimism Pressures Dollar

Last week the US dollar hit a five month low and is presently at its lowest point this year. Optimism among investors has pressured the dollar downward as many investors believe that the worst of the global recession is over. Also pressuring the dollar and affecting currency exchange rates in general are concerns about mounting US deficits and how the US government will finance its debt. Last week the S Korean state pension agency indicated the will reduce their purchase of US government bonds due to deficit concerns.

Industrial Production Data Boosts Investor Optimism

Recent industrial production data from the Euro Zone, UK, and China boosted investor optimism and affected currency exchange rates. The Euro Zone PMI manufacturing index rose to a seven month high of 40.7 in May. The PMI manufacturing index in the UK was stronger than expected boosting the pound to dollar exchange rate. The announcement of General Motors bankruptcy removed all doubt about the struggling US auto industry and boosted risk sentiment.

Dollar Gains on Yen

The only piece of good news for the struggling US dollar was a 1.1% gain in the dollar to yen rate to 96.31 yen. The pound to dollar rate rose to a seven month high of $1.6436 but the big winners were the commodity based Australian and New Zealand dollars. Both the Aussie and Kiwi dollars reached eight month highs of $0.8137 and $0.6520 respectively.

Dollar on Track For Biggest Monthly Decline Since 1985

Last week saw a massive sell off of dollar denominated assets as rising risk sentiment sent investors in search of riskier and higher yielding investments and currencies. The dollar is now on track for its biggest monthly decline since 1985. Kathy Lien of GFT Forex said, “We’re probably looking forward to more positive data from the U.S. economy, which will ease safe-haven flows and continue to drive the dollar lower.”

Most currency strategists expect the downward trend for the dollar to continue. Currency exchange rates could be affected by this weeks meeting of several central banks in the Euro Zone and the UK.

Markets Driven by Recovery Speculation

Recently markets have been driven by speculation that the global economy is starting to recover which has resulted in higher risk sentiment among investors. Investors have shrugged aside warnings from the European Central Bank that recovery will be slow and are seeking higher yielding investments and currencies. This has affected currency exchange rates especially the euro to dollar exchange rate.

Euro Benefits From Increased Risk Appetite

The euro has benefited from higher risk appetite in the last three trading sessions pushing the euro to a high of 1.3830. The US dollar posted losses after the release of the minutes of the Federal Open Market Committee which indicated that the Fed will continue to purchase mortgages and other debt which will result in unprecedented deficits for the United States.

Geithner Says Financial System “Starting to Heal”

Currency exchange rates have been affected by stock market rallies which have many investors believing that global recovery is imminent. This has affected the pound to dollar rate pushing it to multi month highs. Fundamental economic factors such as the stock market rally and improved outlook for manufacturing are fueling the rise in risk appetite. Remarks by US Treasury Secretary Timothy Geithner that the financial system was “starting to heal” coupled with a successful share offering from the Bank of America also helped to raise risk sentiment and affected global currency exchange rates.

Investors Leave Dollar Denominated Deposits

Wednesdays trading saw the euro to dollar exchange at $1.3774 after hitting a high of $1.3830. The pound vs. dollar exchange rate rose sharply to $1.5746, a six month high against the dollar. Traders said that currency exchange rates have been influenced by investors leaving dollar denominated deposits and into higher risk assets.

This week currency markets are following the lead of equities markets and this is expected to continue throughout the week.