The U.S. Dollar finished the week with a strong rally as traders reduced their exposure to higher-yielding assets.  Global financial system worries encouraged traders to pare positions.  Additional selling pressure came from position-evening ahead of next week’s U.S. Fed open market committee meeting.

The GBP USD was the big loser on Friday as shorts dominated this currency pair as stories circulated that the Lloyds Banking Group Plc lacked sufficient capital.  Traders reacted negatively to the news that Lloyds may exit a government program designed to insure nearly $425 billion of its risky assets.  This story helped trigger weakness throughout the Forex markets as traders returned to the safety of the U.S. Dollar.

The EUR USD started the Friday firm but finished on the downside as traders reduced exposure to higher risk assets.  The Euro was able to finish the week on the upside, but Friday’s weak close and negative feelings toward the global banking system may trigger weakness next week or at the least put this currency into a consolidation pattern.

The Dollar gained ground versus the Japanese Yen this week.  Friday’s strength in the USD JPY was triggered by comments from the Japanese Finance Minister.  He stated that exchange rates should reflect economic fundamentals.  This statement triggered selling in the Yen which solidified the week’s technical closing price reversal.  The USD JPY weekly chart closed higher after a prolonged down move.  If this reversal bottom is confirmed next week then look for a retracement to 93.95.

Mixed equity markets and weaker energy prices helped the USD CAD gain ground on Friday.  With this market so close to its lowest level for the year, bottom pickers may start to come in to drive it higher.  Furthermore, the Bank of Canada does not want its currency to rise to a level where it hurts Canadian exports.  The USD CAD could rally sharply higher if global banking concerns trigger a flight to the U.S. Dollar.

Less demand for higher risk assets kept selling pressure on the NZD USD and AUD USD throughout the day on Friday.  Traders seemed a little hesitant to buy at early levels which could be a sign that these markets have reached an overbought status.  If demand for risky assets continues to drop then Aussie and Kiwi traders will be forced to look at economic fundamentals, which could add to the developing weakness.

With negative financial system news infiltrating the Forex markets on Friday and some currencies at lofty levels, don’t be surprised if the U.S. Dollar mounts a strong comeback rally next week.  Although the U.S. Dollar has been beat up since Labor Day, traders will return to the Dollar if there is even a hint of banking or credit market issues.


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