Return Of Risk Aversion Will Buoy The Dollar. By Nicholas Hastings

Risk aversion is on the rise again and so is the dollar.

U.S. employment data at the end of last week proved what many had feared - the global recovery is going to be weaker and longer than the market anticipated.

And, as investors pull back from risky assets as a result, the dollar will resume its safe-haven role.

In recent weeks, not only has risk appetite shown signs of recovering, as economic data showed the global recession ending, but the link between risk and the dollar appears to have become more tenuous.

A study by Calyon Credit Agricole showed that, at times, the U.S. currency even gained when risk appetite improved, as other factors commanded sentiment.

However, the old correlation appears to have reasserted itself.

"It appears that risk aversion's hold over the dollar is becoming the dominant driver again," the bank's study concluded.

And, given the recent data, risk appetite is hardly likely to recover just now.

Although a rise in both manufacturing and service sector activity surveys have lifted hope for a global recovery after 19 months of recession, the hefty 467,000 decline in U.S. payrolls last month as well as the sharp 7.9% quarterly decline in hours worked reinforced fears that the economy is only barely limping out of recession.

As most analysts will admit, hopes of V-shaped recovery have flown out the window. Lena Komileva, group G7 market economist at international brokers Tullett Prebon, summed it up: "The figures remain recessionary and disinflationary."

In Europe, retail sales are still falling even more than expected, and with European banks still showing little sign of easing credit conditions, the European Central Bank will now probably have to keep interest rates down well into 2010.

After the bank's policy meeting last week, ECB President Jean-Claude Trichet hinted that rates could be shaved even closer to zero.

Japan doesn't come out any better. Its data shows deflation taking hold of the economy, reducing any hopes that its economy might prove more resilient.

At this rate, any serious recovery in risk appetite is highly unlikely, ensuring not only that U.S. investors keep their dollars at home but that foreign players also continue looking to the U.S. for safety in troubled times.

Even talk that countries such as Brazil, Russia, India and China might start diversifying their reserves out of the dollar appears to be losing traction.

Although the topic of an alternative reserve currency will doubtless come up at the summit meeting of G8 leaders in Italy later this week, the whole issue is likely to remain off the official agenda.

This should remove any downward pressure on the dollar and allow the likely rise in risk aversion to push the U.S. currency even higher.

Early Monday, the U.S. currency was pushing ahead against most other major, bar the yen. By 0645 GMT, the euro was down at $1.3939 from $1.3985 late Friday in North America, according to EBS. The U.S. was closed for Independence Day.

The dollar was also up at CHF1.0898 from CHF1.0861 while the pound fell to $1.6154 from $1.6328.

The negative sentiment - driven by renewed concerns over the global recovery ahead of this week's G8 summit in Italy - was reflected in the 1.4% fall in the Nikkei index as well as in the rally of the safe-haven yen, with the dollar falling to Y95.29 from Y95.99 and the euro to Y132.83 from Y134.25.

British Prime Minister Gordon Brown is said to be particularly concerned that the fledgling economic recovery is being put at peril by factors such as the latest rise in crude oil prices.