Start Looking For Dollar Support To Return. By Nicholas Hastings

Dollar bulls should be able to relax soon.

That post-summer holiday rise in risk appetite appears to be over before it has really started.

Investor faith in the global economic recovery isn't so strong after all and the rallies in global equity markets and the prices of gold and crude oil are looking distinctly unsustainable.

Sure, for two days earlier this week all appeared bright and beautiful. G20 finance ministers had just promised to keep their rates at record low levels and investors returning from the beaches were keen to bet on the economic optimism.

The fact that the price of gold was soaring over $1000 an ounce and that the price of crude oil was staging another strong rally only encouraged the view that the worst of the recession is over and that risky assets were back in business.

At one stage, the move out of the safe haven dollar pushed its trade-weighted index down to the lowest level for the year.

However, the skies have already started to cloud again and it hasn't taken much to send those gung-ho investors scurrying back for shelter.

Just look at the performance of the Australian dollar. As the Reserve Bank of Australia is the major central bank most likely to hike rates first, the Aussie, like most other commodity currencies, was being pushed to fresh highs for the year.

Strong business and consumer confidence surveys helped to feed the frenzy for all assets Australian.

But, news that the country's housing market had softened in July and that retail sales had fallen sharply sent a jolt through the market as expectations of a rate hike next month fell to 30% from 50%. The Aussie has quickly fallen back from its highs.



The rally in gold also wasn't quite what it appeared to be. Instead of being a reflection of greater global demand, the price rise was driven largely by options as gold producers removed their hedges.

Talk of China diversifying its reserves into gold from currencies also appeared to be of little consequence - given that even a small shift of its $2.13 trillion of reserves would seriously disrupt the market.

The currency team at BNP Paribas said they are "skeptical" over further gold price gains given the lack of fundamental support.

There is also another good reason why investors might be more cautious of pushing the dollar lower at this stage.

The fall in the currency's trade-weighted index will have set alarm bells ringing in central banks all around the world. The last thing they need is a more expensive currency against the dollar as their economies struggle to recover from the recession.

The Swiss National Bank has already admitted to intervening to keep the franc down and the Reserve Bank of Australia has long been believed to be busy behind the scenes. In recent months, the Bank of Canada has joined the ranks of the disgruntled even though it has yet to be detected in the market.

Further central bank objection to the dollar's decline will provide another reason for investors to step back and dollar bulls to feel that the worst of its correction is over.

Early Thursday, the dollar was still under some pressure as equity prices continued to eke out gains.

By 0645 GMT, the euro had risen to $1.4586 from $1.4551, while the dollar was more or less flat at Y92.08 from Y92.10. The euro was also up at Y134.36 from Y133.90.