Recovery Doubts Raise Risk Aversion

Doubts about the speed of recovery from the lingering recession have dampened risk appetite as investors sell higher yielding assets and seek the safe havens of the US dollar and the yen. Both the dollar and yen gained broadly on Wednesday. The dollar was helped by comments by a Japanese official who said the leaders at the G 8 summit did not discuss the US dollar’s status as the world’s reserve currency during Wednesday’s talks on the global economy.

Investors Concerned About Chinese Political Instability

Chinese President Hu Jintao, who was to attend the conference returned home to deal with political unrest in Xinjiang region. Hu Jintao’s absence diminished speculation that any comments about reserve currencies would be added to communiqués from the G 8 summit. China has been in the forefront of nations calling for an alternative reserve currency. The political turbulence in China has some investors concerned. Boris Schlossberg of GFT Forex stated, “Part of the optimism earlier about a worldwide recovery was based on the assumption that China would be this locomotive of growth and keep the rebound going. As the political situation in China becomes problematic, it provides another reason for investors to sell any high-yielding currencies, benefiting the dollar and the yen.”

Investors Wait For Q2 Results

Investors are waiting for the second quarter corporate earnings report from the US. Poor results are expected to boost dollar and yen demand as investors seek safe haven investments. Investors will be paying particular attention to figures from financial institutions. Chris Turner of ING in London stated, “If bank earnings disappoint in any way or the S&P breaks crucial levels, traders will probably start reducing long positions in (high-risk currencies) and the dollar could be bid more.”

This week currency exchange rates will be affected by the G 8 summit taking place in Italy. The most recent communiqué from the group contained no mention of currencies.