Conflicting Statements

Conflicting statements by Russian officials regarding the US dollar’s status as a reserve currency have confused currency markets during the past week. In Monday the Russian finance minister had backed the dollar as a reserve currency but comments Tuesday by Russian President Dmitry Medvedev questioned the dollar’s reserve status. Tuesday’s comments affected currency exchange rates and put downward pressure on the dollar.

Investor Concerns About US Fiscal Stability

Data showing growing US housing starts and a small rise in producer prices erased safe haven demand putting further pressure on the dollar. Russia’s comments dominated markets Tuesday. Omer Esiner of Travelex Global Business Payments stated, “Clearly the largest holders of U.S. Treasuries are increasingly nervous about the fiscal stability of the U.S. going forward. That said, I don’t think it’s to anybody’s interest to see a run on the dollar.”

BRIC Summit Fails to Address Dollar’s Reserve Status

Forex traders and investors have been watching the BRIC (Brazil, Russia, India and China) summit with great interest. The group represents the biggest emerging economies and is expected to discuss ways to reduce the dollar’s dominance in the global economy. Russian President Dmitry Medvedev said in advance of the summit, “The existing set of reserve currencies, including the U.S. dollar, have failed to perform their functions. We will not do without additional reserve currencies.” A statement issued by the BRIC group expressed the desire for a “diversified, stable and predictable currency system”

Risk Appetite Dominates

The euro to dollar traded 0.6% higher at $1.3876 and the yen to dollar rate was 1.3% lower at 96.56. The euro to yen rate fell by 0.7% and the Pound, Kiwi and Aussie dollars all fell by 1% against the yen. Currency exchange rates have been affected by the perception that the global economy is showing clear signs of recovery. Investors remain uncertain whether the dollar’s fall is over or will continue into the near future.

Greenback Pressured

Recently the US dollar has been pressured by a variety of factors. Despite last Friday’s rally and the successful auction of $65 billion of US Treasuries investors remain concerned about the speed of US recovery and mounting US deficits. Russia’s challenge to the greenback as the world’s reserve currency and their announcement that Russia would not purchase more US debt put further pressure on the dollar.

Investors Remain Uncertain About US Recovery Speed

A week age the dollar got a boost from better than expected non farm payrolls data but the figures were not enough to sustain a long term rally for the dollar. Steven Englander of Barclays Capital stated, “The numbers that came in, while they were somewhat stronger than expected, weren’t really strong enough to be a game changer with respect to the U.S. economic outlook. It didn’t change the view on risks of where monetary and fiscal policy was headed.” Investors remain uncertain about the speed of US recovery efforts and some investors feel they are in uncharted territory where US fiscal and monetary policies are concerned. These factors are affecting the dollar exchange rate around the world in Forex markets.

Lots of Data Due This Week

Economic data due this week could have a drastic effect on currency exchange rates. On Monday the Treasury International Capital flows (TICS) for April will be released and on Tuesday the May Producer Price Index and May housing starts will be posted. Also due on Tuesday is the May industrial output and is expected to post a month to month decline of 0.9%. Wednesday the May Consumer Price Index will be released and is expected to show a month to month gain of 0.3%.

G 8 Meeting Watched by Investors

Investors are closely watching the G8 finance ministers meeting but currency exchange rates are not expected to be a topic of discussion. The slew of economic data expected this week should make it a very interesting week for Forex markets.

Treasuries at Seven Month High

Smaller than expected US job losses helped the US dollar to recover some of the losses of the past two weeks. Also helping the dollar was the news that US treasuries rose to seven month highs spurring demand for the greenback. Smaller than expected job losses prompted investors to speculate that the Fed may raise rates in 2010 raising treasury yields.

Dollar’s Recent Fall Was Premature

Dollar exchange rates improved as forex investors noted the improving US economy. Lee Hardman of Bank of Tokyo-Mitsubishi UFJ stated, “If data shows the U.S. economy outperforming others, there may be potential for the dollar to strengthen further in the short term.” Many traders and investors believe that the dollar’s recent falls were premature. The DXY which measures the dollar against a basket of six major currencies rose above 81 affecting the dollar’s exchange rates. The DXY rose 1.6% late last week its highest since December.

Gordon Brown Faces Political Difficulties

The euro to dollar exchange rate fell 0.7% to $1.3870 and the euro to yen rate fell 0.7% to 136.81 yen. Political upsets in the UK affected the pound to dollar rate which 0.8% to $1.5837. British Prime Minister Gordon Brown is facing serious political challenges and support for his Labour Party is at its lowest level in nearly a century.

US Government to Auction 10 and 30 Year Treasuries This Week

Currency exchange rates will be affected by this week’s auction by the US government of 10 and 30 year treasuries. In Asia 2 and 10 year treasury yields hit their highest level since November 2008. Some investors worried that the rise in US treasuries could hurt US stocks triggering a rise in risk aversion prompting a buyback of the dollar.

Global currency exchange rates have been affected by the dollar’s comeback. It would appear that for once the dollar’s rise was not prompted by risk aversion.

Yen Up Against 13 of 16 Major Currencies

http://www.interbank-fx.net/2009/06/yen-up-as-us-payrolls-prompt-safe-haven-demand/yen6/The Japanese yen rose against the S. African rand and the New Zealand dollars ahead of a US report that economists believe will show increasing unemployment in the US which could increase demand for safe haven assets. The yen also rose against 13 of the 16 major currencies. The increase came after remarks by US Federal Reserve Chairman Paul Volcker stating that US recovery is “years’ away. Shoichi Handa of SBI Liquidity Markets Co stated, “People are cutting short positions on the yen in a hurry before major economic events in the U.S., which may drive the market’s direction. If the ADP report today contains a negative surprise, the yen may be bought actively.”

Rising Risk Sentiment Driving Currency Exchange Rates

The yen to dollar exchange rate was at 95.61 while the euro to dollar rate is at $1.4320. Rising risk sentiment has been largely driving currency exchange rates for the past two weeks. Markets seemed to have shrugged off remarks by Volcker who stated that “truly massive fiscal and monetary stimulus is at work, a full recovery will be a matter of years” and that the US economy faces “an unimaginable budget deficit as far as one can see.”

Russia Suggests New Reserve Currency

Also affecting the dollar and currency exchange rates were earlier remarks by Dmitry Medvedev who suggested the need for new reserve currencies to replace the greenback. Susumu Kato of Calyon Securities stated, “Emerging markets are thinking that there are risks associated with the dollar, which will have some negative impact on the forex markets. This kind of talk will have negative implications for the dollar.”

Dollar at 2009 Low

The dollar vs. euro exchange rate is now at its lowest in 2009. Strong US housing sales data reinforced risk appetite and affected global currency exchange rates. Pending US home sales posted their biggest increase in 7 ½ years boosting confidence that the worst of the global recession is over and pressuring the dollar downward. Results of several European central bank meetings are not available yet but are bound to affect global currency exchange rates.

Dollar Pressured by Rising Risk Appetite

Rising risk appetite has pressured the US dollar and is affecting global currency exchange rates across the board. The dollar has fallen to its lowest this year as investors pursue higher yielding investments and currencies. The dollar fell to a five month low and is well on its way to a monthly drop of 6%, the largest monthly decline since 1985. The US jobs report due Friday is expected to reinforce the view that the worst of the global downturn may be over. Kathy Lien of GFT Forex stated, “The tide is turning and we are beginning to see more signs of stability in the U.S. and global economy. 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.”

Bleak Future for the Dollar

The signs of improvement in the global economy are bad news for the dollar which is seen as a safe haven currency in troubled economic times along with the Japanese yen. Last Friday the euro to dollar exchange rate reached its highest this year at $1.4168. The pound gained 10% against the dollar in May, the largest monthly gain since 1985. Many currency strategists believe that the future of the dollar looks bleak in both the near term and long term.

Mounting US Deficits

Investor concerns about mounting US deficits have pressured the dollar and The US job report due this Friday is expected to show an unemployment rate of 9.2%. Fears of a possible credit downgrade for the US were resolved after Moody’s Investor Service said that the triple A rating of the US is secure. This week’s meetings of several banks in the Euro Zone, Canada and the UK are expected to affect currency exchange rates on global forex markets.

At the present time it doesn’t look good for the greenback and most currency experts expect this to continue as US deficits mount and unemployment surges.