Optimism Over Improving Global Economy Pressures Dollar

The U.S. Dollar is trading lower against most major currencies overnight as investor demand for higher yields continues to drive up risky assets.

The U.S. Dollar is trading lower against most major currencies overnight as investor demand for higher yields continues to drive up risky assets. This month investors have been more willing to sell the Dollar and buy stocks and commodities on expectations of a global economic recovery. Furthermore, investors are more confident that central banks will keep interest rates low and plenty of cash in the markets.

Today’s key U.S. economic reports which should have an influence on the Dollar include building permits, housing starts, initial job claims and the Philadelphia Federal Reserve. Investors will be looking for evidence to back Fed Chairman Bernanke’s claims earlier this week that the recession was likely over.

The EUR USD is expected to open better today. Although the U.S. economy appears to be leading the global economy out of the recession, investors have been seeking the higher yields in the Euro. Technically, this market has reached a critical balance point at 1.4686 to 1.4691. A breakout over this area could accelerate the market to the upside. A failure to hold this level will indicate impending weakness.

The GBP USD remains one of the weakest currencies because of the floundering economy. Yesterday it was announced that unemployment was worse than forecast. Today traders could be looking at a weaker than expected August Retail Sales and September CBI Industrial trends survey. Bad news from these two reports will encourage more selling of the British Pound.

The Japanese Yen received a boost overnight when the Bank of Japan left interest rates at 0.1% and announced that a strong Yen may drive prices down in the short-run but could support the economy over the long-run. Traders have been hesitant to push the Yen higher at current levels out fear of a verbal intervention by the BoJ. In the recent past the BoJ has expressed concerns that a high priced Yen could curtail export demand and the economic recovery.

Higher equity and oil prices are needed to keep the Canadian Dollar on pace for higher prices. Although the Bank of Canada has expressed concerns about the rapid rise in the Canadian Dollar and its potential negative effect on the economy, demand for higher yielding assets is likely to overtake these concerns to drive prices higher.

The Swiss National Bank is expected to leave interest rates at low levels at its next meeting. In addition, it should announce that the economy has turned the corner and is beginning to mount a recovery. Investors also suspect that the SNB will report that it will periodically intervene if necessary to keep the Swiss Franc weaker against the Euro.

The NZD USD and AUD USD are struggling overnight. Traders may be waiting for U.S. equity markets to open or the buying may have dried up after yesterday’s strong surge to the upside. This could be an indication that yesterday’s rally may have been overdone.

Lower interest rates are encouraging global investors to sell the Dollar to fund their investments in higher yielding assets. This trend is likely to continue as long the Fed is committed to keeping interest rates low.