Increased Confidence for US Recovery
During the recent recession the US dollar has largely traded on risk appetite and aversion. When the news was bad the dollar usually gained due to its status as a safe haven currency. Recently it appears that the link between the dollar and risk assets such as stocks and commodities is weakening. This will allow the dollar to benefit from favorable US economic data. The weakening of the link between the dollar and risk assets means increased investor confidence in US economic recovery and the perception that the Federal Reserve will be the first to raise rates. During the past year positive US economic data has usually led to dollar selling in favor of riskier assets. Bad economic news has usually prompted investors to seek the safe haven offered by the dollar and the Japanese yen.
Dollar Trading on Fundamentals
The relationship between the dollar and risk is rapidly changing. Last Friday’s US jobs report caused the dollar to gain and speculation that the Fed will raise rates to increase. Marc Chandler of Brown Brothers Harriman stated, “Our hypothesis is that the risk-on/risk-off matrix that seemed to dominate market development during much of the crisis is breaking down,. We suspect it is being replaced by a greater emphasis on country specific macro-economic developments.” Reuters News Agency reported that the correlation between the S&P 500 index and the dollar Index has fallen to zero during the past month and reflects a new dynamic where the dollar can gain independent of changes in risk appetite or aversion.
Euro Sentiment Remains Negative
The change in the dollar’s dynamics is taking place as the Euro Zone suffers from the Greek debt crisis. Although last weekend’s teleconference of EU finance ministers caused a slight euro rally most investors remain euro negative. Japan’s flat economy has pressured the Bank of Japan to keep its loose monetary policies. Phyllis Reed of Kleinwort Benson stated, “We’ve seen the U.S. economy continue to recover and it looks probably the most healthy economy in the developed world and that’s helping to support the dollar. We have problems everywhere else.” Historically the dollar and commodities have a negative relationship and a weak dollar creates demand for dollar denominated assets. For months investors have speculated about a Fed rate hike but the Fed has repeatedly said that rates will remain low for an ‘extended period.’ Many investors believe that if US recovery continues at its present pace the Fed will raise rates sooner than expected. Swiss bank “We’ve seen the U.S. economy continue to recover and it looks probably the most healthy economy in the developed world and that’s helping to support the dollar. We have problems everywhere else,” said in a client note, “The dollar may be in a bit of a holding pattern near-term, not declining materially on increased risk sentiment as better economic data will support a Fed rate hike. And not strengthening materially either until more certainty in the timing of the initial Fed rate hike emerges.”
Quick Forex Tip: A great deal of education is required for success in foreign currency trading. There are several excellent training programs available online. Many of these free courses are written by highly successful forex traders and can provide the novice with invaluable information. Additionally, many forex trading firms offer demo accounts where newbies can trade in real time and use varied amounts of leverage. Demo accounts can help new investors to get the ‘feel’ of foreign currency trading markets.
