Dollar Struggling; Sentiment Shifts Toward Risky Assets

The U.S. Dollar is trading mixed at the mid-session in anunusual day as the normal correlations between the Dollar, gold and equitiesare not working.

The U.S. Dollar is trading mixed at the mid-session in anunusual day as the normal correlations between the Dollar, gold and equitiesare not working.  The lack of major U.S. economicreports this week may be having an influence on the trade. The trade weightedDollar Index is trading lower but this may not be a true assessment of what isactually going on today.

Early in the session it was clear that traders were lookingfor risk as the stock indices rose with the March E-mini S&P 500 reachingthe high for the year at 1148.00. Strong demand for risk was helping to driveup the asset sensitive AUD USD, NZD USD and USD CAD.  At the same time, selling pressure was on thelower-yielding Japanese Yen.

The easing of financial tensions in Greece may be helping to give the EUR USD aboost along with better economic manufacturing news from Italy and France. These events offset a weakexports report from Germany.  Trading has been light and choppy this weekand expected to remain this way until enough buying power can come in topressure the short hedge funds out of the market.

The GBP USD is trading weaker, driven lower behind the weakfundamentals.  Traders are most concernedat this time about the possibility of a credit rating downgrade by one or moreof the credit agencies. Worries over the economic recovery, politicaluncertainty and the Bank of England’s soft monetary policy should continue topressure this currency.

The USD JPY was up sharply because of greater demand forhigher risk assets, but its strength has subsided at the mid-session followinga sell-off in U.S.equity markets. Overnight the Yen felt downside pressure after Chinaannounced that both exports and imports grew at a higher-than-expected rate.

The rising Euro is helping to pressure the USD CHF. Tradersare looking for the Swiss National Bank to announce that interest rates willremain low while offering a more hawkish commentary. The SNB is most concernedabout the impact of the falling Euro on its export market which accounts for50% of the country’s economy. Losses in the USD CHF may have been limited by anintervention by the SNB earlier today.

Falling gold prices and rising crude oil are helping tolimit the movement in the USD CAD. The Canadian Dollar started out strongerbecause of higher equity and commodity markets, but it could not hold its gainsafter gold and U.S.stock indices began their sell-off.  TheUSD CAD began to mount an intraday turnaround after approaching the January lowat 1.0224. Oversold conditions and worries that the Bank of Canada may issue averbal intervention kept shorts from pressing this market further.

The AUD USD has given back all of its earlier gains as U.S. stockmarket weakness sent investors out of higher risk assets and into safer plays.Technically, this market is set up for a daily closing price reversal top. TheNZD USD is trading off its high after demand for risk dried up. Traders arelooking for the Reserve Bank of New Zealand to keep interest rates low whilesuggesting they are not likely to rise until the economy shows a sustainedrecovery.