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Dollar Rallies as Traders Mull External Risks

Last updated 3/15/2010 9:49 AM ET (GMT -5) 3 Comments

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Kathy Lien

Director of Currency Research, GFT

A mild degree of risk aversion has settled into the forex markets this morning, pushing the U.S. dollar higher against all of the major currencies.  On the eve before the Federal Reserve's monetary policy meeting, U.S. economic data was far from impressive.  Manufacturing activity in the NY region moderated slightly, industrial production grew at a slower pace while foreign demand for U.S. Treasuries fell sharply.  Moody's also warned that both the U.S. and U.K. are substantially closer to losing their AAA ratings. EU finance ministers are meeting today to discuss giving Greece financial aid, should they request for it, but so far Germany and France have made no concrete commitments which suggests that it could another meeting that yields no results.

The U.S. dollar remains the biggest beneficiary of global concerns because there are less risk investing the U.S. than in Europe or Japan at this time. Not only could the U.K. face a downgrade, but it is an election year where the current party is losing majority.  Greece and Spain are the two biggest risks in the Eurozone and there is a good chance that Japan could raise Quantitative Easing this week.

This morning's U.S. economic releases were mixed, but the disappointments should not discourage the Federal Reserve from growing more optimistic.  Although manufacturing activity in the NY region slowed, it still expanded for the 8th consecutive month.  There was a particularly large jump in key areas such as employees, shipments and new orders. Industrial production increased 0.1 percent which was weaker than the 0.9 percent growth reported in January but stronger than the market's flat forecast.  Capacity utilization increased from 72.5 to 72.7 percent in February, a precursor to additional hiring.  The only unambiguously weak report was the scaled back demand for dollar denominated assets. According to the Treasury International Capital flow report, foreign demand for long term Treasuries grew $19.1B (against expectations of $47.5B) but due to sales of shorter term Treasury bills, there was a net outflow of $33.4B in January.  For the third consecutive month, China was a net seller of U.S. dollars.  They continued to buy U.S. notes and bonds but dumped holdings of Treasury bills.  China has been openly mulling an more flexible exchange rate and this could part of their grand plan to reduce their reliance on U.S. dollars. 

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Comments (3)

aandrew60

March 15, 2010 at 11:57 AM ET

Always welcome commentary Kathy! Thank you!

Uros

March 15, 2010 at 02:14 PM ET

180450

Demax

March 15, 2010 at 03:11 PM ET

So China is moving to the short end of the yield curve (such as exists - and such as they can)?

Sounds like they are positioning themselves for potentially easier diversification - should that be 'required'. Or am I misinterpreting this Kathy?

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.