The dollar fell this week amidst concerns sparked by a dovish report by the Federal Reserve, which seemed to imply that further monetary easing might be necessary due to sluggish growth in the economy. The most interesting aspect of the change was that the risk-demand relationship which had existed previously in which the dollar tended to gain on the back of the risk aversion seems to have become inverted. this time round.  In fact the news had the effect of sending the dollar down against most counterparts. Treasury Bills fell, making interest rates so low they have become unattractive for potential buyers of the dollar. Treasuries fell further today after ambivalent CPI results which saw a decrease in CPI but and increase of core CPI  above expectations. At midday, Friday the dollar stood at $1.2980 to the euro down significantly from the previous day but was up at $1.5360 to the pound.

   The euro rose today as concerns over the euro zone sovereign debt crisis faded while disappointing US economic data weighed on the greenback. Climbing even above the psychologically key $1.3000 level the rally in the euro continued unabated. This week has been one in which the currency repeatedly dodged incoming blows. First there were fears about stress tests and the benchmarking used in their calculation, once those had been sidestepped there were fears about sovereign debt auctions for Portugal, Greece, Spain and France, but after the final successful 3bn Spanish auction yesterday the euro really came back from the dead rising a hefty 1.6% in a day. Pundits remain skeptical about the euro and they may be right. This rally could be merely an extended countertrend push. There are still huge economic problems in the EU which haven’t even begun to be addressed and whilst this weeks glad tidings from the money markets may be causing a sigh of relief, they are froth to the storm which may follow. The euro at midday was up against the dollar to $1.2980 and up against the pound at £0.8432.

   The pound fell this morning after reaching highs in the 1.54s. Despite being hailed as a new safe haven it failed to rise in this capacity today, although sentiment was overall positive in relation to Europe, despite some shaky figures from the US. It is difficult to see what may have sparked the retracement, as confidence in the UK economy is quite high since the coalition government’s efforts to reduce the deficit and the unified front presented by the coalition party. This could a technical reaction due to the fact that the pound has grown a little overbought in recent days and the pull back could be due to investors cashing in on their positions. Rates for sterling pairs at midday stood at $1.5360 against the dollar and £0.8432 against the euro.

   The yen rose to a nine-month high against the dollar this morning as safe haven demand for the Japanese currency was excited by a renewed wave of risk aversion. Deteriorating US economic data, record low yields on Treasury Bills and an ambivalent CPI release today made investors seeking a safe harbor turn their backs on the dollar. Despite concerns by rating agencies and the IMF which recently encouraged Japan to increase its consumption tax to cover its bulging budget deficit, the country’s high personal savings and current account surplus (mainly as a result of its vast exports) the economy is thought to be immune from a Greek style meltdown in the short term, however fears remain for the long term. At midday the yen stood at ¥87.16 to the dollar and ¥112.91 to the euro.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst