Dollar Holds Gains

The greenback held recent gains and rose to a two month high against the Japanese yen. The yen was widely pressured by Japanese fiscal concerns after Standard and Poor’s said Japan’s rating was at risk if the government does not take measures to stabilize and reduce Japan’s debt. Trading has been thin in advance of years end holidays in Asia, Europe and the United States. Neil Mellor of Bank of New York Mellon stated, “People are starting to get increasingly worried about Japan’s fiscal situation. Fiscal issues will be the big story at the start of 2010, especially in Japan and the UK.” Investor concerns about how the UK will finance massive deficits have weighed heavily on the pound in currency markets.

Fed Rate Speculation

Greatly improved US economic data has led many traders and investors to speculate that the Fed may raise rates sooner than expected and will also withdraw emergency measures taken at the beginning of the global financial meltdown. When the Fed will raise rates is expected to be a key question and investors are closely watching comments by Fed policymakers for any signs of rate hikes. Traders and investors say that once markets get a sense of timing for Fed exit strategies the yen could become the currency of choice for carry trades. Tomohiro Nishida of Chuo Mitsui Trust and Banking Company stated, “Yield differentials between the U.S. and Japan have started to widen slightly, showing evidence the market is conscious of the prospect of the U.S. exiting its easy policy. With that perception behind the dollar, if the U.S. heads towards the exit, the dollar-funded carry trade is expected to wane as Japan is seen as more likely to ease further.”

Wednesday (Dec. 30th) offered little in the way of economic data as Asian, European and US markets prepare to close for year end holidays.

Markets Quiet at Years End

The US dollar gained on the yen in thin year end trading and rising equities and commodities prompted a rise in risk sentiment among investors and currency traders. European trading was minimal as market participants were off for the year end holidays and UK markets were closed for a public holiday. Markets showed little reaction to the attempted terrorist attack on a US airliner. Monday, December 28th, was the last business day of the year and trading will resume January 4th. Many traders will be focusing on whether the dollar will continue recent gains going into 2010. Antje Praefcke of Commerzbank Corporates and Markets in Frankfurt stated, “Some corporates out of Japan may have been active in the yen, but it’s very, very quiet here, and I think (European) companies will have done 99.9 percent of what they had to do this year already.”

US Consumer Sentiment Report Due

The yen which is traditionally viewed as a safe haven currency was pressured by rising risk appetite. The dollar has gained about 1% against the yen in 2009 after falling nearly 19% in 2008. Market watchers are waiting for December’s US consumer confidence figures and the Standard & Poor’s Case-Shiller home price index for October. Both reports are expected to show continued recovery in the US. Many investors believe that the Fed may raise rates sooner than expected as recent data shows consistent signs of recovery. Johan Javeus of SEB stated, “Anything that points in the direction of the Federal Reserve raising interest rates earlier than previously thought will support the dollar — there has been no indication of this from the Fed but U.S. data recently has been coming in on the strong side.”

Canadian Dollar Gains on Greenback

The Canadian dollar traded at its highest against the US dollar since October and rose to its highest against the euro in thirteen months. The Canadian dollar gained 1.4% against the US dollar in December and gained for the second straight month. In October 2009 the Canadian came within three cents of parity with the greenback and is poised for a yearly gain of 17%.

Dollar Sheds Risk Trading

A Bloomberg article has pointed out that the US dollar is now rallying ‘in tandem with stocks’ for the first time since the demise of Lehman Brothers. For most of the past year the dollar has been traded on risk sentiment. Some currency experts believe that the worst may be over for the dollar. The dollar, equities and raw materials are on track for their largest two month gain since 2008 when the recession reared its ugly head. The correlation between stocks and the dollar reflects investor confidence that the US will be the first to recover from the current global recession. In the past the dollar gained as investors sought safe haven from economic turmoil. The dollar weakened when investors took advantage of record low Fed rates to finance carry trades. The dollar has also benefited from year end profit taking.

Fed to Withdraw Stimulus Packages

On December 4th the news that the US unemployment had fallen the most in three years pushed the greenback higher as investors bet that the positive data would convince the Federal Reserve to raise rates. The DXY rose 1.7%, the largest gain since January 2009 when UK banking troubles increased the demand for the safe haven offered by the dollar. Dennis Gartman wrote in the Gartman Letter, “We are witnessing a watershed shift in sentiment regarding the dollar. We do not use the term watershed often, but when we do we mean it.” Federal Open Market Committee said on Dec. 16 that it would end most emergency measures by March 2010. The Fed cited “improvements in the functioning of financial markets” The Fed cited, “improvements in the functioning of financial markets” and stabilizing labor markets as reasons for the move. Despite speculation the Fed said it would leave rates “exceptionally low” for an “extended period.”

Euro Zone Banking Troubles

The euro weakened in currency markets after the European Central Bank said that financial institutions may have to write down an additional 187 billion euros ($268 billion USD). The central bank’s loans to property companies and eastern European nations may threaten recovery in the euro zone. Mansoor Mohi-uddin of UBS AG wrote, “Sentiment in the euro zone will suffer from the fiscal troubles of its weakest members. This hurts the euro as it makes it less likely the ECB will be in a position to raise interest rates if one of its member countries faces the threat of defaulting on its debts in future.”

Iranian Troops in Iraq

The dollar gained yet again against the euro which has been pressured by two Greed sovereign debt downgrades and Austrian banking concerns. The dollar rose on safe haven bids after new reports said that 11 Iranian troops had entered Iraq and raised the Iranian flag over a disputed oil field. Initially Iraq’s deputy interior minister Ahmed Ali al-Khafa denied the reports but said later that there had been a series of incursions by Iran. He said he would seek a diplomatic solution rather than a military one. The Swiss Franc which is considered a safe haven currency rose on rumors of a coup in Pakistan. John McCarthy of ING Capital Markets stated, “It’s Greece, it’s Pakistan and certainly Iran has been one of the factors helping to support the dollar.” The euro hit its lowest since March against the troubled euro.

Pakistan Coup Rumors Trigger Safe Haven Flight

The Japanese yen rose against the euro and the Aussie dollar as the news from Pakistan sent a chain reaction through markets. The currencies later recovered most losses but the euro was down 0.4% against the Swiss franc trading at 1.49571CHF. Tomohiro Nishida of Chuo Mitsui Trust and Banking Company said, “The euro/Swiss was just at the key point on the charts and a rumor about Pakistan seemed to have pushed down the pair. Stops below 1.50 francs accelerated falls in a market with low liquidity and spurred risk avoiding trade at the year-end.” The euro was also down 0.4% against the yen to 128.43 and the Aussie fell 0.5% vs. the yen trading at 9.40 yen.

Dollar to Hold Recent Gains

Most currency experts predict that the US dollar will hold onto last weeks gains. The dollar continues to be supported by evidence of US recovery and the Fed’s decision to withdraw emergency measures in February 2010. Nick Bennenbroek of Wells Fargo stated, “We see the U.S. economy continuing to recover and monetary policy settings starting to move back to normal. Although our economics team does not expect actual rate tightening to take place until late in 2010, the withdrawal of non-conventional measures could start tipping the scales in the dollar’s favor.”

Euro Gains Slightly in Advance of Fed Statement

The US dollar fell slightly against the euro in advance of the results of the FOMC meeting. The dollar is still holding near a 2 ½ month high against the euro. Investors are waiting to see if the data from the FOMC meeting will offer any clue as to when the Federal Reserve may raise rates and withdraw various emergency measures. The euro was up 0.3% on the day at $1.4577 after hitting session peaks of $1.4587. Brian Dolan of Forex.com stated, “Stocks are up, the U.S. data was a bit on the risk-positive side and gold has pressed higher, so the dollar’s taking a bit of a breather. Also, we’re looking for a benign statement form the Fed, with rates on hold and no significant changes, and that should be good for risk appetite.”

Euro Pressured by Banking Concerns, Greek Downgrade

The euro has been widely pressured by banking concerns, the Greek downgrade and a downgrade in the Spanish debt rating. Austria nationalized one financial institution and put the nation’s largest cooperative bank on a watchlist. A spokesman for the bank said that the bank is not at risk of nationalization. The Aussie dollar fell after data showed that Australia’s gross domestic product grew by only 0.2% during the third quarter, much less than expected. The Aussie fell 0.7% on the day against the greenback trading at $0.8991, the lowest in three weeks. Tsutomu Soma of Okasan Securities stated, “Weaker-than-expected growth data as well as comments from a top central banker have curbed bullish views towards the Australian dollar a little. Players, including Japanese institutional and individual investors, sold the Aussie to trim long positions in Australian assets.”

Fed Upbeat About Recovery

The Fed has said repeatedly that rates are likely to remain low for an “extended period.”. Most experts believe that while rates will remain low the Fed will be upbeat about recovery prospects. According to a UBS analyst, “There could be more constructive language on the business outlook in the last FOMC meeting (of the year) but we don’t think they will ease off of the lower-for-longer stance.”

Euro Pressured by Austrian Banking Concerns

The US dollar hit a two month high helped by recent employment and industrial production data. A recent report showed that US industrial production rose in November at a higher rate than had been forecast by economists. The euro was pressured by Austrian banking concerns after the Austria nationalized Hypo Alpe-Adria Bank International AG. An Austrian press report said that the nation’s central bank and its financial market regulator have put the country’s largest cooperative bank, Oesterreichische Volksbanken, on a watchlist. A spokesman said that the bank is not at risk of nationalization and the press report is inaccurate. Lingering concerns about the fiscal health of Greece have also pressured the euro. After having its rating downgraded Greek Prime Minister George Papandreou’ announced spending cuts to ease concerns.

Dubai Bailout Eases Fears

Monday’s announcement of a $10 billion dollar bailout for Dubai eased some banking concerns. Dubai stocks rose 3.4% after the bailout announcement. Abu Dhabi’s Dubai bailout helped to prevent a default on a $4.1 billion bond issued by property firm Nakheel. All this translated into a two month high for the dollar against most major currencies. Michael Woolfolk of BNY Mellon in New York said, “We’ve had a string of very good U.S. data releases compared to Europe, and today’s data suggests inflation is picking up again, so the whisper out there is that the Fed will hike rates sooner than expected.”

Pound Reverses Decline

The pound reversed its decline against the euro and yen as UK economic data showed that inflation rose to its fastest pace in sic months. Some analysts say this weakens the ECB’s argument for keeping rates at record lows of 0.5%. Last week Chancellor of the Exchequer Alistair Darling said that the UK inflation rate would rise about 3% in 2010. The pound gained 0.5% against the euro trading at 89.44 pence per euro. Against the yen the pound  rose to 146.03 yen and traded at $1.6236 against the greenback.

Euro Pressured by Recent Euro Zone Events

During the past two weeks the euro has been pressured by a succession of events which began with Dubai World’s default and debt restructuring. Next Greece’s sovereign credit rating was downgraded from A- to BBB+. Next Spain’s economic outlook was downgraded to negative. Also pressuring the euro is its perceived strength. Nine months ago most experts had predicted that the euro zone would be the first of the major economies to recover from the global recession. Unfortunately economic data did not match expectations and many now predict the euro zone will trail Japan and the US in economic recovery.

Euro Could Hit Three Month Low

Last month the euro rose to a one year high of $1.5144 is now poised to fall to a three month low of $1.4446. Tsuyoshi Okada, the managing director at the research unit of Japan’s largest foreign exchange margin dealer in Tokyo stated, “The charts are now showing signs of change for the euro, and herald an end of its rising trend,” Okada said. “Should the decline of the euro gain traction, the immediate target will be mid-$1.46 and the next target will be the $1.4446 level.”

Federal Reserve Meets on Tuesday and Wednesday

Investors will be watching the US Federal Reserve meeting which will take place on Monday and Tuesday. The Fed’s policy setting meeting will take place about a year after the central bank cut rates to historic lows of near zero. Speculation that the Fed will raise rates sooner than expected was prompted by better than expected US employment figures and positive retail sales and consumer sentiment data. Despite the speculation it is widely expected that the Fed will continue to keep rates low well into 2010. Fed policy makers have pointed out that stalled credit markets and high unemployment indicate a prolonged recovery from the recession. Philadelphia Federal Reserve Bank President Charles Plosser cautioned that one month of positive data does not equal a trend.

Narrower Trade Deficit Pressures Dollar

The US dollar declined for the second day in a row vs. the euro as a narrower-than-expected U.S. trade deficit for October and much improved jobless claims doused demand for safe haven assets. The Euro’s gains were capped by investor concerns about the fiscal health of both Greece and Spain. On Wednesday Standard & Poor’s said Spain’s credit outlook is negative. On Tuesday Fitch cut Greece’s rating sparking debt concerns. Jacob Oubina of Forex .com stated, “The continuing claims rolled off quite a bit, and they came in about almost 300,000 below what the market was looking for. And the trade balance in the U.S. also improved considerably. A positive for the risk trade.” Against the dollar the euro was up 0.2% at $1.4758 and against the yen the dollar gained 0.3% trading at 88.45 yen.

Greek Concerns Will Not Split Euro Zone

ECB Governing Council member Ewald Nowotny said that worries about Greek finances would not split the Euro Zone. Johan Javeus of SEB in Stockholm said about the Greek situation, “The euro has probably taken a bit of a hit from these internal problems in the euro zone.”

Aussie Jobs Data Fuels Rate Speculation

Positive Australian jobs data fueled speculation that Australia’s central bank would raise rates. Earlier in the week the Reserve Bank of New Zealand said that New Zealand may raise rates sooner than anticipated. The Australian dollar gained 0.8% vs. the greenback trading at $0.9158 and the Kiwi dollar rose 1.2% to $0.7272. Some currency analysts speculated that markets may be changing from the recent trends of trading on risk sentiment to trading on fundamentals. You-Na Park of Commerzbank stated, “Interest rates are becoming a more important factor and the market is looking more at fundamentals now.”

BOE to Hold Rates Steady

The pound was up 0.4% against the dollar trading at $1.6316 and against the euro rose 0.3% to 90.26 pence. Earlier the Bank of England said they would hold rates at record lows of 0.5%.

New Zealand to Raise Rates

The dollar fell against the euro as US stocks rose prompting demand for riskier assets. New Zealand’s Kiwi dollar rose after Reserve Bank Governor Alan Bollard said the central bank would raise rates in the middle of 2010. The pound fell against both the US dollar and the euro after Chancellor of the Exchequer Alistair Darling imposed a 50% tax on bonuses for bankers and said he would raise income taxes. He also predicted larger than expected deficits. The Standard & Poor’s 500 Index rose 0.3% after falling as much as 0.6%. The Kiwi rose 1.8% against the US dollar to 71.99 U.S. cents after the remarks by the Reserve Bank Governor.

Darling’s Bad News

The pound fell against the 16 most traded currencies after Darling told British legislators that the UK deficit will be 611 billion pounds ($990 billion USD) and said the UK economy would shrink by 4.75% this year. Ian Stannard of BNP Paribas SA said, “Sterling still looks vulnerable. There are no real measures here to start to tackle concerns that financial markets and investors are likely to have.” Investors were also concerned by statements by Moody’s Investors Service that said the UK and US ratings may “test the Aaa boundaries” due to massive deficits and declining public finances. UK debt will account for 89.3% of UK gross domestic product in 2010. Most analysts believe that the Bank of England’s Monetary Policy Committee will leave rates at a record low of 0.5% and will continue its asset-purchase program at 200 billion pounds.

Canada Leaves Rates Untouched

Yesterday the Canadian dollar, affectionately called the ‘loonie’ fell to its lowest in ten days after Canada’s central bank left rates at record lows. The bank of Canada said the loonie which has gained 15% against the US dollar this year could hinder Canadian economic growth. Michael Leavitt of MF Global Canada Co stated, “We have the four majors working against the Canadian dollar today. Lower crude, gold and equities, as well as the Bank of Canada staying firm on holding rates until the end of the second quarter of 2010.”

Bernanke Cites Weak Economy and Unemployment

On Tuesday (Dec. 8th) the US dollar fell after Fed Chairman Ben Bernanke said that the US economy is weak and unemployment is expected to continue. He also said that the Fed would leave rates low for an ‘extended’ period dousing market speculation that the Fed would raise rates after last week’s better than expected jobs data. Last week US employers cut 11,000 jobs, far less than the 130,000 that had been predicted. Last Friday’s jobs data had led to speculation that the Fed would cut rates in mid 2010. Jun Kato of Shinkin Central Bank Research Institute stated, “Bernanke’s remarks reminded people that the economy is not rosy yet.” On Tuesday the dollar index .DXY fell 0.2 percent to 75.651.

German Industrial Production Declines

The euro fell against the dollar on unexpected German data that showed that German industrial production declined 1.8% in October. Further pressuring the euro was the news that Fitch Ratings cut Greece’s rating from A- to BBB+. The rating cut followed news that Standard and Poor’s reported that Greece’s banks faced the biggest risks in Europe. Concerns about Dubai rose as Moody’s ratings agency downgraded six Dubai-linked issuers and said that no ‘meaningful’ support could be expected from the Dubai government. Remarks by Jean Claude Trichet who said the Euro Zone faces a prolonged and bumpy recovery did little to help the euro in currency markets.

Dollar at One Month High vs. Euro

The dollar is now at a one month high vs. the euro and the dollar posted its biggest gain since June last Friday as the jobs report showed that US employers’ cur fewer jobs since the recession began. The euro traded at $1.4826 and against the yen the dollar traded at 89.41. The dollar and stocks have tended to trade opposite directions since the recession began. Vassili Serebriakov of Wells Fargo stated, “We’ve seen this equity-dollar correlation reinstalled. The key to breaking the correlation is consistently improving U.S. data shifting interest-rate expectations, and outside of payrolls we haven’t really seen that.”