Dollar On Its Strongest Run in Four Months as FX Traders Seek Shelter

• Dollar On Its Strongest Run in Four Months as FX Traders Seek Shelter
• Euro Traders Find Little Confidence in EU/IMF/Greece Talks, Turn to Growth
• British Pound Rallies following Strong Employment Numbers, BoE Inflation Concerns
• Japanese Yen’s Strength Downgraded by Need to Budget Target
• Canadian Dollar Further Supported by Growth Upgrade to Match Yield Outlook

Dollar On Its Strongest Run in Four Months as FX Traders Seek Shelter
Typically, with a generous outlook for return, investors are willing to take on a substantial level of risk. However, at this point, we have seen many of the market’s more traditional asset classes climb to 12 to 18 month highs (dampening expectations for further capital returns) while the outlook for yield income has maintained bearings more aligned to the tentative pace of economic recovery. It is this rebalancing of risk/reward that has revived the US dollar’s appeal as a safe haven within its asset class and subsequently lifted the single currency to consistent gains this past week. In fact, the string of five consecutive daily advances for the Dollar Index is the best performance for the currency since the period through December 22nd. On the other hand, conviction doesn’t seem as prominent a factor of this upswing as consistency has been. The reason for this disconnect can be found in the source of the currency’s strength. It is uncertainty surrounding the ongoing Greece aid discussion and the growing concern over general sovereign debt risk that has tempered investors’ taste for return and the risk it naturally entails. From the Euro-region, officials met to discuss the conditions for the potential 45 billion euros in loans that were tentatively promised to the struggling economy. Greek Prime Minister Papaconstantinou’s suggestions that the nation would be able to tap its international credit lines before all the details are ironed out may seem a boon; but the persistence of doubt that these measures will solve the problem overshadow the marginal promises that seem to be tacked onto this rescue with each day. Through pure market mechanics, the burden this uncertainty saddles the euro with would naturally benefit its most liquid counterpart. However, the greenback’s general appeal as a safe haven amongst currencies draws the roots of its strength a little deeper than a mere euro/dollar relationship

On the other hand, the dollar is not a fundamentally infallible asset. It is just one of the best options within the Forex market space. Beyond the fiat currency, there are other securities (gold, money markets, etc) that can offer a greater level of stability and perhaps even return. The growing concern over sovereign debt risk significantly diminishes the appeal of government bonds which are benchmarks for currencies. The US is hardly exempt from such concerns as its own debt-to-GDP ratio elicited a warning from ratings agency Standard & Poor’s not long ago that the world’s largest economy was moving closer to losing its top credit rating. As wide spread as this concern is amongst developed nations (and the lack of stability in the emerging market alternative), it draws a line along asset classes in determining a harbor for capital rather than a particular currency. Under these conditions, we have further seen the normal influences of some key drivers warp. For example, the strong first quarter earnings season for the US (Morgan Stanley and Wells Fargo were notable additions today) may actually benefit – or at least have less effect on – the dollar itself because risk aversion is based more in asset class rather than region.

Moving from investor sentiment to growth, the relative strength of recovery is still a big factor in currency strength. Today’s the IMF updated its forecasts for the world’s largest economies. Lifting its outlook for the global economy through 2010 from 3.9 percent to 4.2 percent, investors were more attuned to the leaders in the mix. While the US won’t be able to compete with China, its own upgrade from 2.7 percent to 3.1 percent offer greater opportunity for working down budget deficits and boosting national returns. Looking ahead to tomorrow, event risk finally picks up with existing home sales, initial jobless claims and factory-level inflation figures. Don’t expect too much volatility from this group.

Related: Discuss the US Dollar in the DailyFX Forum, US Dollar Likely to Rally Further if S&P 500 Continues Recent Decline

Euro Traders Find Little Confidence in EU/IMF/Greece Talks, Turn to Growth
Few traders, tax payers or politicians would consider Greece to be on the path to stability – despite the assurances officials continuously espouse. Today, representatives from the European Union, International Monetary Fund and Greece met to discuss the conditions surrounding the activation of the 40 billion euros of assistance that had been previously avowed to the struggling member. Though there were few official remarks from the general group, Greek Prime Minister Papaconstantinou said the nation would be able to tap the rescue fund even before all the details were ironed out (discussions are expected to run for another two weeks with a final draft statement seen sometime around May 15th). This is certainly another step of progress; but in reality, investors’ skepticism growth with each day while the marginal improvement in the situation slows. With fresh strikes against austerity cuts planned in the coming days and weeks, we will see the cracks in this plan. Perhaps tomorrow’s PMI data – and its ability to benchmark general growth forecasts – will shift the focus and rein in the euro.

British Pound Rallies following Strong Employment Numbers, BoE Inflation Concerns
It was another fundamentally-intensive day for the British pound; and ultimately the outcome of this wave was once again bullish. However, the sterling’s progress was stunted by the pesky uncertainty that resides with the general election that is only two weeks away. Given the probability that policy towards growth and fiscal responsibility could change dramatically shortly, traders are hesitant to bear new trends. Nonetheless, the BoE minutes this morning would voice concern in the ‘stickiness’ of inflation – a hawkish sentiment if ever we heard one. At the same the same time, a 32,900-person drop in jobless claims marked the biggest back-to-back decline since 1997 (though the jobless rate hit a 16-year high).

Japanese Yen’s Strength Downgraded by Need to Budget Target
Running out of options for righting the economic ship, Japanese officials are starting to take a look at their third largest concern (after growth and deflation): credit health. Officials are reportedly discussion options for reducing the national deficit to either zero or 3 percent of GDP by 2020 – ambitious, especially at the expense of growth. As for the expansion, the IMF boosted its outlook for 2010 from 1.9 percent from 1.7 percent.

Canadian Dollar Further Supported by Growth Upgrade to Match Yield Outlook
In its round of growth forecasts, the IMF would upgrade its outlook for the world’s eighth largest economy. A boost from a 2.6 percent pace to 3.1 percent reflects the overall health of the nation and its currency. Along with the Bank of Canada’s tentative signal that a rate hike is in place, all the fundamental ducks are falling into line for the loonie to be one of the strongest currencies amongst the majors.

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