Dollar Falls after Beige Book Signals Recession May Be Over

The U.S. Dollar tried to regain some strength late in the trading session following the release of the Fed’s Beige Book but major buyers were noticeably absent driving the Dollar down into the close.

The U.S. Dollar tried to regain some strength late in the trading session following the release of the Fed’s Beige Book but major buyers were noticeably absent driving the Dollar down into the close. Record low borrowing costs are contributing to the weakness in the Dollar and the strength in higher yielding assets. Investors have been selling the Dollar to fund their appetite for risk. The U.S. Dollar is currently the cheapest funding currency.

Today the Fed reported in its monthly Beige Book that the U.S. economy was stabilizing or improving. This positive report was a strong sign that the worst recession in decades was over and that the economy may have turned the corner.

While the Fed remains “cautiously positive” about the economy, the road to recovery is expected to remain rocky primarily due to flat retail sales and a weak labor market. The biggest concern for many of the world’s central banks is when to put an end to the stimulus plans which have supported their economies. This presents the next challenge for the central banks because waiting too long could be inflationary while acting too swiftly could curtail gains.

The EUR USD continued its strong rally despite recent weak economic news. In addition, European Central Bank President Trichet reiterated his belief that the economic crisis is not over and that financial powers should develop a strategy to exit from their stimulus plans. With the ECB interest rate set at 1% and not likely to drop further and the U.S. rate likely to stay at or near zero, traders have been primarily attracted to the higher yields offered by the Euro Zone.

The GBP USD closed higher ahead of tomorrow’s Bank of England monetary policy announcement. Traders expect the BoE to leave interest rates unchanged. The market moving news will be any new developments dealing with the BoE’s asset buyback program. Last month the BoE decided to increase the amount of money available for this program. This news shocked the market and triggered an almost month long decline in the Pound. Although a minority of traders believes the BoE may ease a bit on its aggressiveness to fight the U.K. recession, most traders believe that the BoE will leave its quantitative easing program unchanged.

The USD JPY remained under pressure as investors continue to seek the higher yielding Japanese Bonds. Today’s action took out the July low at 91.73 but the market was able to regain this price on the close. Although a closing price reversal bottom was not actually formed, the action indicates that the buying may be greater than the selling at current levels. The daily swing chart indicates that a move through 93.30 will turn the main trend to up.

The USD CAD traded sideways to lower today following yesterday’s closing price reversal bottom. The strong rally in the equities and the firm crude oil market lent some support to the Canadian Dollar but the technical picture may be indicating that the USD CAD may be getting ready to mount a short-covering rally. Traders may be hesitating at current price levels because of the previous warnings from the Bank of Canada regarding the rapid rise in the Canadian Dollar and its negative effect on Canadian exports.

Appetite for risk continued to help boost the AUD USD and NZD USD to new highs for the year despite possible negative fundamental developments. Overnight Australia announced that retail sales were down. This news could cause the Reserve Bank of Australia’s rate hike to be postponed until later this year.

Gains were limited in the NZD USD because of tomorrow’s Reserve Bank of New Zealand meeting. Traders believe the RBNZ will leave rates unchanged and may reiterate its desire to keep rates low until 2010. Technically, the closing price reversal top at .7006 may be an indication that a major top is forming. Technical traders will want to see a follow-through break to the downside to confirm the potentially bearish action.