Dollar Advances for a Fourth Consecutive Session Despite a Tempered Pace of Risk Aversion

Dollar Advances for a Fourth Consecutive Session Despite a Tempered Pace of Risk Aversion
Though trading conditions eased through Monday’s session, the correlation between risk aversion and dollar gains held up nicely. And, it was the sustained trend of deterioration in this primary market dynamic that would lead the US currency to its fourth consecutive daily advance and strongest close in nearly seven months. What’s more, the greenback’s gains wouldn’t stand as an aberration as other speculative benchmarks would mark their own milestones. For equities, the Dow Jones Industrial Average would see the first close below 10,000 since November 4th and gold would maintain its post below $1,075. From this observation on cross-market correlations, we can establish that the trend of the past month has altered traders’ fundamental perception of the market. Whereas in the past, traders would respond to any sign of economic and financial improvement while discounting discouraging news; market sensitivity now rests with any sign that conditions are deteriorating while improvements are generally ignored. Tilting the needle on risk trends at the start of this week was the lack of confidence elicited from this past Saturday’s Group of Seven (G7) meeting. Given the focus and market response to the Greek deficit troubles (an accessible effigy of credit and economy problems that lace Europe and beyond), investors were perhaps hoping for a more detailed plan in the event that conditions deteriorate even further. However, officials would simply offer reassurances without offering any concrete plans to coordinate efforts or support those essential economies that lag so far behind that they can create trouble for the rest of the world. Don’t expect these concerns to go away in the immediate future.

Outside the realm of investor sentiment, dollar traders would find little to work with Monday. Fresh from the G7 meeting, Treasury Secretary Timothy Geithner would say in an interview that the US would ‘never’ lose its top rated credit rating. While it would be highly unlikely that the world’s largest economy and the source of so much financing would see a downgrade, it is not impossible. Given a record budget deficit, a global market that has grown increasingly wary of fundamental risks, and the potential that the US economy and its currency will lose clout over time; there is a sound argument that credit risk exists. As for scheduled event risk, the only indicator worth note was the Conference Board’s Employment Trends Index. Compiling known data, the indicator is still relatively adept at pointing out general trends in the labor market (which can sometimes be clouded by enthusiasm surrounding certain numbers). Rising for a fifth consecutive month, the index reached a one-year high of 93.2, bolstering the inkling of improvement measured in the Department of Labor’s data. Looking out over the next 24 hours; underlying sentiment will maintain its influence over the market’s most actively traded currency. However, there is modest market-moving potential in the NFIB Small Business Optimism survey and wholesale sale data. The former indicator is particularly important from a fundamental standpoint as small businesses account for a generous portion of economic output and a bulk of employment in the United States.

Related: Discuss the US Dollar in the DailyFX Forum, US Dollar Extends its Run but How Long will Risk Aversion Hold?

Euro Finds Little Consolation from EU Finance Ministers’ Greek Guarantees at G7
Less than a year ago, it seemed commentators were certain that the euro would quickly erode the dollar’s reserve currency status as one of the most stable units of international value available on the market. Convictions have changed dramatically in recent months. Looking at the market’s interest, the CFTC’s Commitment of Traders (COT) report revealed that speculators were the most bearish on the single currency since its inception. A fundamental review of the currency offers a good explanation for this state of affairs. Where the euro was prized for its stability and distributed risk back when global conditions were improving, the recent economic struggle has exposed the region’s shortcomings. Policy and rules administered across many economies to maintain the health of the whole leads to situations where there are leaders and laggards among the members. While Germany and France both continue to recover; Greece, Spain, Portugal, Italy, Ireland and many others are struggling to foster growth and meet the guidelines of the collective. At the end of the G7 this past weekend, European Finance Ministers offered a tentative guarantee of Greece’s efforts to work down its deficit. However, without a blatant bailout plan, the market remains skeptical. Furthermore, even if the nation was bailed out, it would set a precedence for rescue when many countries are looking at significant problems.

Related: Discuss the US Dollar in the DailyFX Forum, Euro on the Ropes as Greece Debt Crisis Grows Contagious

Japanese Yen: Lending Troubles another Road Sign to the Next ‘Lost Decade’
While the Japanese yen was following underlying risk trends in establishing a volatile session though little direction; those that plan on trading this currency for more than a few months were keeping tabs on the fundamentals that crossed the wires early in the Asian session. According to data released by the BoJ, banks in Japan reduced lending at the fastest pace since September of 2005 last month. In the year through January, banks cut financing 1.7 percent. This is not all that surprising given recent data that suggested demand for loans was at a five year low and nearly one-third of the nation’s for production was idle. However, putting this data into perspective, the troubles between growth, credit and deflation are essentially the same mix that led to the ‘lost decade’ the country suffered through the 90’s and 2000’s.

Related: Discuss the US Dollar in the DailyFX Forum, Japanese Yen to Decline if Risk Recovery Lifts Carry Trades

Commodity Currency Policymakers Start Rolling Back Emergency Aid
Given the efforts by policy makers to roll back emergency aid and stimulus in the US and Euro Zone, it only makes sense that the officials behind the high-yield currencies would follow suit. Australian Treasurer Wayne Swan announced the government’s guarantees on large deposits and wholesale funding would end on March 31st. This marks another abrupt and hasty step by policy makers there. Seeing the Aussies’ move, New Zealand Finance Minister Bill English said they make take similar steps soon; but considering RBNZ Governor Bollard warned the economy was still fragile, this may prove burdensome. What’s more, the central banker tacked on the word ‘maybe’ to the mid-year rate hike potential.

Related: Discuss the Australian and New Zealand dollars in the DailyFX Forum, Australian Dollar to Rebound if Stock Markets Correct Higher

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Written by: John Kicklighter, Currency Strategist for DailyFX.com
E-mail: jkicklighter@dailyfx.com