Traders Sell Dollars to Fund Equity Rally

The U.S. Dollar is under pressure at the midsession although today’s weakness is not as bad as yesterday’s.

The U.S. Dollar is under pressure at the midsession although today’s weakness is not as bad as yesterday’s. 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.

The EUR USD continued its strong rally this morning 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.

Strength continued in the GBP USD ahead of tomorrow’s Bank of England 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.

The USD JPY remained weak as investors continue to seek the higher yielding Japanese Bonds. Today’s U.S. 10-year auction results could move this market following the announcement of the results. If yields rose then the Japanese Yen may feel pressure.

The USD CAD is trading mixed as the Canadian Dollar approaches a key resistance area. Traders may be hesitating at this area 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 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 have been 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.