UAE Central Bank Promises Liquidity

The US dollar fell against most major currencies after the United Arab Emirates central bank promised liquidity to local banks easing default fears among investors. Risk sentiment remained muted after a Dubai official said that the government would not guarantee Dubai World debt and that its creditors are solely responsible for their actions. The UAE’s central banks actions sparked an Asian equities rally as the central bank promised support for regional banks easing risk aversion and putting downward pressure on the dollar.  Camilla Sutton of Scotia Capital stated, “We’ve seen risk aversion decrease from the levels we saw on Thursday. All in all, last week just shows how vulnerable markets are to any fears.”

Dollar Faces Further Decline

The dollar index which measures the dollar against six major currencies was down 0.3% to 74.788 after hitting a fifteen month low of 74.170 last week. US stick futures were promising due to holiday retail optimism and the easing of Dubai fears among investors. The euro vs. dollar rose 0.3% to $1.5016 just short of last week’s fifteen month high of $1.5140.The dollar vs. yen gained 0.1% trading at 86.52 yen. Andrew Wilkinson of Interactive Brokers Group told Reuters, “Should investors sweep the Dubai-related jitters under the carpet, the dollar will likely face a further decline.”

ECB Meeting, US Jobs Report

The dollar is now headed for the longest length of monthly declines against the euro partially caused by a statement by the United Arab Emirates’ monetary authority that said it ‘stands’ behind’ local and foreign banks. Brian Kim of UBS AG said, “Everybody’s coming back to a dollar-under-pressure story. Now that the U.A.E. is coming in to help, people are relieved.” Once again the Aussie and Kiwi dollars gained on the greenback. The Aussie rose 0.7% to $0.9135 while the Kiwi gained 0.8% trading at $0.7154. Later in the week investors will be watching the European Central Bank’s rate decision and the US jobs report due Friday.

US Recovery to be Slower Than Ecpected

The US dollar gained on the euro after US economic data showed that the US recovery from the current recession is likely to be slower than previously thought. Third quarter GDP data from the US Department of Commerce showed that the US economy grew at a slower pace than earlier government estimates. The consumer confidence report showed a weak labor market. The data showed that the US economy grew 2.8% far lower than the government’s estimate of 3.5%. The US has suffered massive job losses throughout the recession.  Alan Ruskin of RBS Global Banking and Markets stated, “The (consumer confidence) breakdown is less encouraging with the main components that broadly track PCE (in coincident fashion) generally weak. That includes the present situation numbers, and the labor market indicators that show jobs hard to get remaining at extraordinary high levels…This has triggered profit-taking on short dollar exposure.”

Risk Appetite Dimmed by GDP Figures From US

The Japanese yen rose to six week highs against the dollar partially because of safe haven demand. On Tuesday the yen traded at 88.36 and the dollar fell 0.5% on the day. The euro vs. dollar rate fell 0.2% and the euro traded at $1.4934. The euro had gained earlier as better than expected German sentiment survey offset German banking concerns among investors. The euro which is usually tied to risk appetite fell after dismal US economic data and GDP figures. Jacob Oubina of Forex.com said, “This (GDP) number is slightly negative for risk appetite because of the downgrade in the personal consumption number. But overall, this is an old number and it should have limited impact going forward.”

Fed Minutes to be Released

Later today (Tuesday, Nov 24th) the US Federal Reserve will release the minutes of the meeting which took place on November 3rd and 4th. Investors and traders will be watching for indications of when the Federal Reserve will withdraw stimulus measures. The Fed minutes are also expected to include economic projections.

Dollar Yen Gain on Safe Haven Demand

Risk aversion has returned to currency markets and the US dollar gained for the second straight session in a row as investors dumped risky assets in favor of the safe haven dollar and Japanese yen. Stocks in Europe and the US fell along with gold and commodities putting downward pressure on commodity linked currencies such as the Canadian, Aussie and Kiwi dollars. Despite recent advances the greenback has declined 14% since March 2009 and the perception that the Federal Reserve will keep rates near zero has also hurt the US dollar. The Japanese yen gained on the euro while the US dollar continues to decline against the yen. Vassili Serebriakov of Wells Fargo stated, “The market is reducing its exposure to risk. The dollar is benefiting.”

Optimism About Recovery Premature

Analysts believe investors and traders want to see concrete evidence of recovery before investing in high yielding assets. European Central Bank President Jean-Claude Trichet said that it is premature to say the economic crisis is over and warned that banks should be prepared for the withdrawal of stimulus programs. Andrew Wilkinson of Interactive Brokers summed up the current situation when he said that investors “are starting to get cold feet over the health of asset market rallies, taking the line that stocks have come too far too soon and that they should — if only for safety’s sake — perhaps hold onto their dollars after all.”

Pound Falls on Banking, Deficit Concerns

The pound declined against the US dollar, the euro and the yen due to investor concerns about massive UK budget deficits and concerns about the health of the British banking sector. Hans-Guenter Redeker of BNP Paribas SA Stated, “People are realizing that things are not looking too bright for high-debt countries. People regard sterling as a higher-risk premium.” Te pound declined 1% against the dollar to $1.6509 and fell 0.6% against the euro to 90.07 pence.

Traders Take Advantage of Recent Dollar Rally

The US dollar fell on Wednesday as investors took advantage of the dollar’s biggest rally in three weeks. Investors and traders remain concerned about massive US deficits and the indication that the Federal Reserve may keep interest rates at record lows into 2012. Most traders say the dollar’s decline will continue because of rate concerns. On Tuesday St. Louis Fed President James Bullard said that the Fed will cut back asset purchasing programs instead of raising interest rates. Jacob Oubina of Forex.com said, “That throws cold water on any lingering thoughts of rate hikes.”

Bernanke’s Remarks

Bernanke took investors by surprise when he stated that the Fed was “attentive to implications of changes in the value of the dollar,” but also said that rates would remain low for an “extended period.” Some traders believe the statement indicates that the Fed is concerned that further depreciation could cause inflation. Camilla Sutton of Scotia Capital stated, “Though not sounding an overtly alarmed tone over the value of the dollar, commenting on the currency shows that the Fed is concerned enough….to at least address the issue” Currency analysts believe that weak inflation and industrial output data are not enough to prompt the Fed to raise rates.

Calls For Flexible Chinese Currency Policy

On Tuesday European Central Bank President Jean-Claude Trichet said that a strong dollar is in the US’s interest and that the euro was never meant to be used as a reserve currency. Societe Generale strategist Peter Frank said that Bernanke’s remarks were probably intended to ‘smooth’ the dollar’s decline instead of reversing it.  The euro vs. dollar rate fell 0.7% and the euro traded at $1.4872 on Tuesday. Many analysts say that for the dollar to reverse its decline China needs a more flexible currency policy or the Fed needs to raise rates. Johan Javeus of SEB in Stockholm said, “Neither of those prerequisites have been fulfilled, so the controlled, grinding lower of the dollar will continue.”

Dollar Hits 15 Month Low Monday

The US dollar pulled back from a fifteen month low as declining US stocks pared demand for riskier assets. The dollar is often seen as a barometer of risk sentiment among investors and traders. The pound fell sharply on news that Fitch’s Ratings said that the UK was the major economy most at risk among major economies. The Brazilian real fell the most against the dollar on concerns that the Brazilian government would intervene and try to stop the real’s appreciation which is hurting exports. The Dollar Index rose 0.2% to 75.145 but the index has lost 7.7% so far this year.

Pound Hit by Rating Concerns

The pound pulled back from a six day run against the dollar and fell 0.3% to $1.6712. Fitch Ratings had cautioned the UK government against further stimulus measures citing massive UK debt. David Riley of Fitch stated, “Our stable rating outlook reflected our expectation that the U.K. government will articulate a stronger fiscal consolidation program next year.”

Canadian Dollar Gains

The Canadian dollar gained against the green back as a rise in oil prices sent the commodity based currency higher in currency markets. The currency last traded at 95.26 U.S. cents. David Bradley of Scotia Capital stated, “Everything seems to have turned around at once here. And it looks to me like the Canadian dollar can probably continue to do better.” The rise came after oil edged above $80 a barrel and the promise of the G 20 nations to maintain stimulus policies.

Gold Futures at Record Highs

The decline of risk sentiment has sent gold futures to record highs and many traders predict gold will rise to $1,150 or as much as $1,200 an ounce. The European economy sent mixed signals. Italy and France reported sharp falls in while German output surged. Italian output declined 5.2% and French output fell by 1.5% in September. US Federal Reserve officials are expected to speak on Tuesday and investors will be watching for any signs of changes in monetary policies.

US Unemployment at 10.2%

The Japanese yen gained on Friday after US figures showed an unemployment rate of 10.2%. The US government reported a loss of 190,000 jobs in October causing concerns about the state of the US economy and spurring demand for the safe haven of the yen. Although recent news reported an increase in US GDP and a rise in consumer sentiment the new figures raised doubts about economic recovery.

US Labor Market to Remain Weak

Unemployment has plagued the US economy and about 20000 jobs a month have been lost in the US. Economic analysts believe that the US labor market will remain weak and consumer sentiment could be pressured. Samarjit Shankar of BNY Mellon stated, “The yen has obviously benefited … from risk aversion, The big psychological impact was from the 10.2 percent unemployment rate. It’s going to cast further doubt on whether the incipient U.S. economic recovery can be sustained without further government support,”

US Rates to Remain Low

The dollar vs. yen rate fell 1% and the yen last traded at 89.85 yen. The euro fell 1.2% against the yen trading at 133.45 yen. Two-year U.S. Treasury yields eased after the jobs figures putting further pressure on the dollar against the yen. The widespread belief that US rates will remain low has many currency experts speculating that the dollar is replacing the yen as a source of funding for carry trades. In carry trades investors and traders borrow low yielding currencies and use them to fund investments in higher yielding assets and currencies. Paresh Upadhyaya of Putnam Investments said, “Dollar/yen has essentially become an interest rate play. With interest rate differentials narrowing further against the dollar, you’re seeing dollar/yen under pressure.”

Commodity Currencies Gain

Despite the spike in risk aversion the dollar was little changed against most other major currencies. Commodity based currencies like the Aussie and Kiwi dollars rose against the greenback. The Aussie rose 0.6% to US$0.9166 while the Kiwi rose 0.4% to US$0.7245.

Big Week for Economic Data

This week will be a busy one for forex traders and investors. Meetings on monetary policy are scheduled in the US, the Euro Zone, Australia, and the UK. On Friday US employment figures are due. The even investors are waiting for is the G 20 conference scheduled for this weekend in Scotland. The G 20 nations are expected to discuss currency exchange rates and the risks of designating certain bans as ‘too big to fail.’ Canadian Finance Minister Jim Flaherty stated, “We usually have some discussion about the currencies in the world, the downward pressure on the U.S. dollar, the relative inflexibility of some of the Asian currencies, so I expect it’s going to come up.”

Canada Wants Discussion of ‘Moral Hazard’

Other sources said that currency exchange rates will be discussed only in the context of global economic recovery. Canada is expected to push for a discussion of the ‘moral hazard’ in global banking systems referring to banks that engage in risky behavior with the expectation that governments will ‘bail them out.’ Flaherty stated, “I know we’re going to have some discussion about this whole issue of financial institutions that are so-called too big to fail. We need to talk more about that. We don’t want to create moral hazard in the financial systems around the world.”

G 20 to Bring New Policies to the Table

At their September summit G 20 leaders agreed to come up with policy guidelines to ensure sustainable global economic recovery and to prevent a repeat of the current recession. On Monday rising stocks and more evidence of global recovery pout downward pressure on the US dollar and the Japanese yen which are widely seen as safe haven currencies. Throughout the current recession the US dollar has been seen as a barometer of risk appetite.

Commodity Based Currencies Benefit

The rise in US stock indexes and the rise in gold and oil prices benefited commodity linked currencies such as the Aussie, Canadian and Kiwi dollars. Currency markets are expected to be somewhat volatile due to the amount to economic data to be released this week.