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.
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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.”
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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.”
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Gold Futures Fall
US gold futures fell below $1,200 an ounce on Friday and the dollar gained after US jobs data showed that the US shed 11,000 jobs in November rather than the 130,000 that had been forecast earlier. Gold fell and the dollar gained against the euro and yen on the positive jobs data. The US unemployment rate fell from a 26 year high of 10.2% to 10.0%. The strong jobs report prompted speculation that the US Federal Reserve may raise rates sooner than expected. A rate hike would make dollar denominated assets more attractive to investors. Paresh Upadhyaya of Putnam Investments stated, “The market is pricing in more scope for changes in Fed policy, meaning, higher interest rates. That’s why we’re seeing a rally in the dollar. But I wouldn’t put too much into this dollar rally. First of all, it’s a Friday and its December, so there’s usually very poor liquidity. If anything, this is a technical washout.”
Euro Falls Below $1.50
The euro fell below $1.49 and may be headed for its largest one day fall since June. In early afternoon trading the euro was down 1.5 percent at $1.4840. The ICE Futures’ dollar index rose 1.6% to 75.85 the largest one day gain since October 2008. The dollar index has declined 7% this year as traders and investors speculated that US recovery would be slow and prolonged and that the Federal Reserve would keep rates at historic lows. Fabian Eliasson of Mizuho Corporate Bank said, “A jobs recovery is the last piece of the puzzle before we can say we’re in full recovery, so it raises the question that maybe rates will go up sooner rather than later. That’s pushed the dollar higher.”
Investors Speculate About Fed Rate Hikes
Recent Fed statements about keeping rates low for an ‘extended period’ have prompted investors to use the dollar to fund carry trades. Eliasson stated, “If (signs of a job recovery) continue, you may start to see the dollar rally on strong data rather than the opposite.”
Quick Forex Tip: Interbank FX traders are at the top tier of the global forex market. A majority of all daily transactions in forex markets are conducted by traders from ten large banks. Despite market manipulation by central banks many economists have cited forex markets as closest to the ideal of perfect competition - meaning that no market participant is large enough to set currency prices. As a result, forex trading has become popular with smaller investors because forex markets offer investors the opportunity to profit during troubled times , allowing them to offset losses in other markets.
IMF and Eurozone Chiefs Say Euro Overvalued
For a short time the euro hit $1.51 despite warnings from Eurozone finance chiefs that the currency is ‘overvalued.’ In early trading in London the euro hit 1.5109 and fell later to 1.5099. The IMF and some Eurozone finance ministers view the euro as too overpriced according to Eurogroup leader Jean-Claude Juncker. Jean-Claude Juncker made the comments after a meeting of the Eurozone nations that was also attended by the IMF’s European director Marek Belka. Juncker stated, “We are in agreement with him when he says that the euro is overvalued and that a certain number of adjustments are desirable.” The European Commission predicts Eurozone growth of 0.7% for 2010 and 1.5% in 2011. At the present time the 27-nation EU as a whole reports that 22.51 million people are unemployed.
BOJ to Keep Rates Low
The Bank of Japan which is under pressure to boost the troubled Japanese economy said it will inject more than $100 billion dollars into the Japanese financial system. The central bank said it would keep rates at 0.1% and would push 10 trillion yen ($114 billion USD) into the financial system. Gold hit record highs and on the London Bullion Market gold rose from $1,192.50 on Tuesday to $1,214.13 per ounce on Wednesday.
Further Dollar Decline Predicted
Some analysts predict a further dollar decline after US home sales unexpectedly rose and Dubai World said that talks with creditors are ‘constructive.’ The dollar fell for the second straight day against the euro as US and European stocks rose. The US dollar fell for the fifth straight month losing 1.9% in November. The Canadian dollar gained on rising gold and oil prices and is now at a six week high against the US dollar. The Canadian dollar rose 1.5% to C$1.0406. Traders and investors are waiting for the US non farm payrolls report due Friday. Worse than expected results could trigger a bout of risk aversion.
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UAE Monetary Authority ‘Stands Behind’ Local and Foreign Banks
The US dollar is now headed for the longest length of monthly declines against the euro since 2004 after the UAE’s monetary authority said it ‘stands behind’ local and foreign banks easing investor fears and putting downward pressure on the dollar. Brian Kim of UBS AG stated, “Everybody’s coming back to a dollar-under-pressure story. Now that the U.A.E. is coming in to help, people are relieved.” Against the euro the dollar fell 1.4% in November declining for the fifth straight month. Dubai World which is $59 billion in debt said on November 25th that it would seek a six month moratorium on payments to creditors sending ripples through stock and currency markets.
US Bank Exposure Limited
Some analysts pointed out that US bank exposure to Dubai debt is a manageable $9.9 billion compared with European banks that have lent the troubled company nine times as much. Richard Franulovich of Westpac Banking Corp stated, “I was shocked to see on Friday the savageness of the risk aversion that flowed from Dubai. In the cold light of day, the hard facts are it’s not a big hit there and moreover the authorities there have obviously stepped in and provided certain liquidity guarantees.” The dollar index which tracks the US dollar against six other major currencies fell 0.1% to 74.892 for a monthly decline of 1.8% in November.
Yen’s Rise Hurting Exports
The Japanese yen declined after a Japanese government minister said that the Japanese government will intervene to attempt to stem the yen’s rise. The yen’s rise of 5.1% against the greenback is hurting the profits of major exporters such as Sony and Toyota. Japanese strategy minister Naoto Kan who is also a deputy Prime Minister said, “In light of the Dubai shock, we want to respond more aggressively than originally planned with an extra budget. We also want to stop the yen’s rise and cooperate with the BOJ.” Investors will be paying close attention to the European Central Bank meeting and the US jobs report due Friday.
Quick Forex Tip: Interbank forex trading determines pricing in all levels of currency markets. Spreads available to interbank traders are sharp and unavailable to outsiders. Interbank traders who can guarantee a large number of transactions for large amounts can demand a smaller spread between the bid and ask price. Unfortunately these same spreads are not available to the average investor making relatively small transactions. Thus, for the average investor to participate in interbank forex trading, s/he must do so through the use of a broker.
Dollar Yen Hold Gains
The US dollar and the Japanese yen held gains due to a decline in risk sentiment and falling stock and commodity prices. US, European and Asian markets declined causing investors and traders to dump risky assets in favor of the safe haven offered by the dollar and yen. Tokyo’s Nikkei fell 0.5% and the S&P’s 500 Index suffered the worst one day percentage decline in three weeks. The dollar was also supported by banks seeking safe haven assets such as U.S. government bonds. Many traders believe that all the dollar buying is seasonal and demand from overseas corporations buying dollars in advance of years end. A Japanese trader said, “Hedge funds are cashing out their positions to prepare for year-end redemption requests from their clients. And that move is encouraging others to take profits as well.”
Bank of Japan Holds Rates Steady
The Bank of Japan held present interest rates, a move that was widely expected, and offered an improved assessment of the Japanese economy. The Kiwi dollar extended Thursday’s losses of 2% and against the greenback traded at $0.7256. The Aussie dollar which fell 1.6% on Thursday was helped by a Japanese asset manager who bought Australian dollars against the yen.
Trichet’s Remarks
Market reaction was subdued after remarks by ECB President Jean Claude Trichet who said it was too early to declare the recession over. Trichet also said that exceptional monetary policies would have to be phased out gradually. In a Speech at the 19th Frankfurt European Banking Congress Trichet said, “The mood in the financial system is one of relief. But as of today, it is too early to declare the crisis over.” About emergency measures Trichet stated, “Emergency treatment and strong medicines are sometimes necessary. But, if their use is prolonged, they can lead to dependence and even addiction.” Light trading is expected next week as Japanese markets close on Monday for a national holiday and US markets will close Thursday for Thanksgiving.
Quick Forex Tip: Interbank fx trading determines pricing in all levels of currency markets. Spreads available to interbank traders are sharp and unavailable to outsiders. Interbank traders who can guarantee a large number of transactions for large amounts can demand a smaller spread between the bid and ask price. Unfortunately these same spreads are not available to the average investor making relatively small transactions. Thus, for the average investor to participate in interbank fx trading, s/he must do so through the use of a broker.
Dollar Pulls Back From 15 Month Low
The US dollar rose from a fifteen month low as investors tried to fathom whether the global economic outlook justifies the rise in higher yielding currencies and assets. On Monday the dollar weakened as US unemployment data and the results of last weekend’s G 20 meeting prompted investors to speculate that US interest rates would remain at historic lows. The British pound fell sharply after Fitch’s Ratings said that the UK government was the most at risk of having its triple AAA rating lowered if the government engaged in new stimulus programs. Andrew Wilkinson of Interactive Brokers Group stated, “With many currencies reaching new highs recently, there is a reasonable amount of resistance toward a headlong lunge into fresh territory for now.”
German Investors Pessimistic
The euro vs. dollar fell 0.2% to $1.4957 just short of the $1.50 mark and against the yen the dollar was down 0.1% to 89.87 yen. The dollar index, DXY, rose 0.2% after hitting a fifteen month low on Monday. The euro was pressured by German ZEW results which showed that investors were more pessimistic than during the past four months. Concerns that investors have become overly optimistic pressured recent winners like the Aussie dollar which declined 0.3% against the US dollar to $0.9274.
Fed has Cautious Outlook For Recovery
US Federal Reserve officials struck a cautious note on Tuesday about US economic outlook. Disappointing economic data from the US points to a slow recovery and rates are expected to remain at near zero for an extended period. The Canadian dollar got a bit of good news as oil prices climbed above $80 a barrel. The Canadian dollar or ‘loonie’ rose to 95.26 US cents. Promises by the G 20 group of nations to keep stimulus measures in place also benefited the loonie. Mixed economic signals from the euro zone pressured the euro. Italy and France reported sharp falls in output while Germany reported a surge in production.
Quick Forex Tip: Interbank FX traders are at the top tier of the global forex market. A majority of all daily transactions in forex markets are conducted by traders from ten large banks. Despite market manipulation by central banks many economists have cited forex markets as closest to the ideal of perfect competition - meaning that no market participant is large enough to set currency prices. As a result, forex trading has become popular with smaller investors because forex markets offer investors the opportunity to profit during troubled times , allowing them to offset losses in other markets.
Dire Predictions
Pundits and some economists have been writing about the possible demise of the US dollar for years. Many of these articles are alarmist in tone and have titles like “The Coming Global Collapse” and most are based on speculation. Despite these dire predictions investors and traders remain unalarmed. Some analysts believe that a sharp drop in the dollar or market volatility could create a crisis of confidence in the US dollar and its role as a global reserve currency.
US Deficits Cause Concern
Some investors are concerned about the United State’s ability to fund massive deficits and some nations, most notably China, have expressed concern about the sustainability of the dollar’s reserve currency role in global economics. Rising stocks and well received auctions of US Treasuries suggest that most investors have confidence in the dollar. The US dollar has fallen 15% against a basket of six major currencies since March and has fallen over 37% from a 2001 high.
US to Keep Rates Low for ‘Extended Period’
The dollar vs. euro exchange rate has been steady with the euro hovering in the vicinity of $1.50, down 6% against a record euro high of $1.6040 in March 2008. Michael Woolfolk of BNY Mellon said, “If we breach $1.60. I think that’s too far, too fast and could cause concern about a dollar demise.” Low US interest rates have contributed to the dollar’s weakness and recently investors and currency traders have been using the weak dollar to fund carry trades. Most economists expect the US Federal Reserve to keep rates low for an extended period. At this weekend’s G 20 summit the International Monetary Fund warned against withdrawing stimulus policies ‘too soon.’
Weak Dollar Good for US Exports
In the US the weak dollar is looked at positive for boosting US exports even though the current Obama administration gives lip service to a strong dollar policy. Some economists warn that a weak dollar could cause a flight from US assets leading to an unhealthy rise in interest rates.
Quick Forex Tip: The average investor usually participates in the interbank market through a broker who handles funds for a large group of investors. The large amount of money given to the broker gives him access to the favorable spreads available in the interbank market. For small investors there are a huge number of interbank FX reviews available online. These reviews give the average investor the ability to research the positives and negatives of the brokers reviewed. Most interbank FX reviews will detail customer service experiences, reliability and investment track records.
Dollar at One Month High
The US dollar hit a one month high as UK banking woes and falling stocks in Europe and Wall Street dampened risk sentiment. The pound fell on Tuesday as several UK banks underwent shake ups. Bank of Scotland shares fell 5% after the bank agreed to sell some of its businesses. Currency traders remain wary in advance of meetings of the US Federal Reserve and the European Central Bank. The Fed is widely expected to keep rates at near zero for an “extended period.” Andrew Robinson of Saxo Capital Markets stated, “We have a slew of central bank meetings starting today. It’s going to be a bit uncertain and nervous, and under the circumstances a bit of range trading.”
Aussie Falls on Rate Hike
The Aussie which has been a big winner lately fell after the Reserve Bank of Australia raised rated from 3.25% to 3.5% leaving investors guessing when the central bank would hike rates again. The Aussie fell to $0.8957 from a high of $0.9042. Other commodity based currencies rose in Asian markets after the International Monetary Fund announced the sale of 200 tons of gold to the Reserve Bank of India.
Stocks Hit Four Week Low
On Tuesday global stocks hit a four week low and UK banking troubles spurred risk aversion benefiting the US dollar. Poor results posted by UBS UBSN.VS and bank shake ups in the UK prompted investor concerns about the health of banking systems. Banking giant CIT filed for bankruptcy. David Thebault of Global Equities in Paris stated, “UBS just posted ugly results that bode ill for European bank results and CIT just filed for bankruptcy. This raises the question: isn’t it too early to pay back government money?”
G 20 Conference Ahead
Also dampening risk sentiment is the upcoming G 20 conference scheduled for this weekend in Scotland and the US jobs report due Friday. Forex traders and investors will have a slew of information to sort through this week.
Quick Forex Tip: Interbank forex trading determines pricing in all levels of currency markets. Spreads available to interbank traders are sharp and unavailable to outsiders. Interbank traders who can guarantee a large number of transactions for large amounts can demand a smaller spread between the bid and ask price. Unfortunately these same spreads are not available to the average investor making relatively small transactions. Thus, for the average investor to participate in interbank forex trading, s/he must do so through the use of a broker.
