DJ Forex Focus

This dollar rally could well have legs.

Rising concern over the strength of the global economic recovery and a renewed interest in safe havens are likely to keep the U.S. currency in demand.

The fact that speculative short positions in the dollar are also at high levels makes an upward correction in the U.S. currency that much more likely.

Hopes that the Group of 20 nations' summit in Pittsburgh last week would inject fresh confidence in the global recovery certainly failed to materialize.

On the contrary, a pledge by leaders to maintain the extraordinarily stimulative policies that have been in place since the credit crunch suggested they remain nervous of more bad economic news to come.

Some of this disappointing news was already in evidence Friday in the form of unexpectedly weak durable goods orders and home sales data from the U.S.

Forecasts for this week's list of economic data, including the latest Institute for Supply Management manufacturing survey and new unemployment numbers, aren't much better.

Lena Komileva, chief G7 market economist with international broker Tullett Prebon in London, summed it up this way: "It signals a flat recovery from a weak level and continued business caution about cash flows and the outlook for domestic demand."

In other words, the world recovery is going no where fast.

It isn't any surprise, therefore, that the market is interpreting a visit by Bank of England Governor Mervyn King to the Riksbank as an opportunity for him to discuss Sweden's reduction of its deposit rate to make quantitative easing more effective.

The BOE made no comment but it has already surprised financial markets with moves suggesting that it is hardly comfortable with the direction the U.K. economy is taking.

The reaction in other financial markets to the state of the global economy also suggests the dollar rally may be here to stay.

Despite recent sharp rises earlier this year, global equity markets are showing signs of topping out. Market analysts are particularly concerned about the poor performance of the Shanghai Composite Index in recent days.

"This will be monitored carefully over the coming sessions, but for now the bias is to sell equities until the market grips support," said the technical analyst team at Bank of Scotland in London.

Crude oil prices also appear to reflect concern about the disappointing outlook for global demand, with futures prices falling $10 a barrel over the last month.

With data from currency futures markets showing short-speculative positions on the U.S. currency still rising last week, this could well point to a dollar rally gathering momentum as investors once again shy away from risky assets and head for safe havens.




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Early Tuesday in Europe, a small bounce in equity markets, excluding the Shanghai index which fell another 1.0%, helped lift the dollar to Y90.04 by 0645 GMT from Y89.61 late on Monday in New York, according to EBS.

The euro rose to $1.4633 from $1.4606 as well as to Y131.76 from Y130.91.

The yen was coming under pressure as Japanese Finance Minister Hirohisa Fujii appeared to backtrack on recent suggestions that he wouldn't intervene in currency markets, signaling that the yen's recent upward movement has been too strong.