Forex U.S. Review – USD falls as risk appetite picks up, lifting euro, GBP, CAD

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The dollar erased earlier gains against the euro as the Standard & Poor’s 500 Index rose 3.4 percent after falling 4.4 percent yesterday. Declining U.S. jobless claims sent equities higher, adding to optimism that the U.S. economy is strengthening. This boosted market sentiment and helped lift riskier currencies like the euro, as investors were keen to take on more risk and move away from the safe haven dollar. After a market rout yesterday when stock markets took a dive and there was a risk off environment everywhere, today investors were itching to get into more risk.

Sterling appreciated against a lot of its major counterparts, including the dollar, against which it rebounded from a three-week low reached in the European session. The U.K.’s austerity plan and fiscal cuts gained market credibility after George Osborne, U.K. Chancellor of the Exchequer rejected opposition demands to review spending cuts. Osborne said U.K. banks hold enough capital and liquidity to weather the current market turmoil. Osborne reiterated that Britain must stick to its tough austerity plans and leaders must redouble efforts to tackle the euro zone debt crisis. GBPUSD climbed from a session low of 1.6135 to a high of 1.6232.

The Swiss franc weakened against the dollar and the euro after Swiss National Bank Vice President Thomas Jordan announced a temporary peg to the euro would be an option to curb franc strength. Jordan also told local press that the SNB could make monetary policy more expansive, fueling speculation Switzerland could soon impose negative interest rates. The euro rose to its highest level against the Swissie in twelve years, since the Single Currency was formed in 1999, rising to 1.0917 from an early session low of 1.0428. USDCHF peaked at 0.7684 from a low of 0.7376.

USDJPY was volatile today as it fluctuated between a high of 76.58 and a low of 76.92, but not far from the record low. Yen is still strong against the dollar as it is perceived as a safe haven and investors are still concerned about a global growth slowdown despite the U.S. Fed keeping interest rates low. However, yen see-sawed throughout the session for fear of letting it gain too much as that would prompt a Bank of Japan intervention just like last week. Yen strength is also attributed to a record high Chinese yuan fix which strengthened other Asian currencies used as a proxy for the Chinese currency.

The Canadian dollar advanced against the greenback as U.S. stocks rose, reducing demand for the USD as a refuge. When the S&P 500 index gains, dollar falls, due to the inverse relationship, because if the stocks market is up, risk appetite picks up and demand for a safe harbour in the dollar falls. Positive U.S. jobless claims data also helped risk appetite. Good news south of the border spill over to Canada since the U.S. is Canada’s major trading partner. Rising oil prices rose today also helped lift commodity-linked currencies like the loonie, which is a major oil exporter. USDCAD fell from 0.9965 down to 0.9848.

Gold prices fell today, by the most in seven weeks due to margins on gold contracts being raised. CME Group Inc., the world’s largest futures market, announced today it increased margins on gold contracts by 22 percent. The change in margin has prompted investors to readjust their positions in gold, many are unwinding their long positions as the short-term risk-reward is not in favour of gold. After hitting a new record high above $1,810 in Asian trading today, spot gold has been falling since then, to as low as $1,731.77 in New York trading. Meanwhile, market sentiment improved today compared to yesterday, and the U.S. equity markets got a boost with better U.S. jobless claims data, making investors feel better about taking risk and hence did not need to hang on to the safer dollar and could move away to invest in riskier assets.