The Dollar slid yesterday by over 250 pips against the Pound and EUR to 1.4044 and 1.3211 on risk aversions. This was sparked by good news coming out of Britain’s banking sector, led by Barclays, which said they won’t need the 4-billion-Pound government aid for their investment banking arm. The reason why this led to the Dollar’s decline against its major currency pairs, such as the GBP and EUR, is because when investors feel there is less risk in the market they invest in riskier assets. Therefore, investors drop less risky assets and currencies, such as the Dollar, and pour their money into riskier assets, such as shares in the stock market.
This is a pattern that we are likely to see over the coming weeks. For example, when it looks like the global economy is improving, and the recession seems it may be ending earlier-than-anticipated, then the safe-haven Dollar is likely to drop. This marks a contrast to last week, when the Dollar rose significantly against a number of its main currency pairs, such as the Pound and EUR.
The Dollar’s decline yesterday was also due to the better-than-expected data release from the U.S. that showed Existing Homes Sales at 4.74 million, significantly higher than the forecasted 4.40 million. This resulted in a continuation of the Dollar’s earlier gains. The combination of positive news yesterday on both sides of the Atlantic led to rallies in British and European stock markets, as investors abandoned the Dollar. The American stock market also made decent gains yesterday.
Looking ahead to today, the behavior of the Dollar may be similar to yesterday, as traders continue to reevaluate their portfolio. Traders are advised to follow the release of the CB Consumer Confidence figures coming out of the U.S. at 15:00 GMT. If the results are better than expected, then the Dollar may continue to decline against the Pound, EUR, and Yen. It is also advisable to follow the situation following the Senate’s approval of President Obama’s nominee for Treasury Secretary Timothy Geithner. It may take the currency market another day to digest the positive news for Obama and the U.S.
