Dollar Remains Vulnerable To Risk For Now. By Nicholas Hastings

Little has changed over the last week and the status quo remains--leaving the dollar vulnerable to risk for now.

After a week of major central bank meetings, key economic data and even a summit of G-20 finance ministers, the U.S. currency remains under pressure.

Indications are that investors will continue to use the dollar to fund purchases of higher-yielding assets, such as commodity and emerging market currencies.

As before, these dollar losses should be limited--given both the rise in extreme short positions but also the growing stress in options markets, which will prevent the U.S. currency from falling too far.

"If the options market is right, the dollar looks poised for a significant break higher: risk reversals across the G-10 currencies are their most bid for dollar calls since March, when the trade-weighted dollar was some 10% higher," said John Normand, a senior currency strategist with JPMorgan in London.

For the time being, though, if the dollar is headed anywhere, it is headed down.



The general reaction in financial markets to the events of the last week has been one of relief. Major surprises have been avoided, policy direction remains much as anticipated and a general recovery in risk appetite can resume.

Although there was a brief hiccup in market sentiment after last Friday's sharper-than-expected rise in the rate of U.S. unemployment, to levels last seen back in 1983, G-20 finance ministers who met in Scotland over the weekend soon put paid to any suggestion that either the pace of the global recovery or the pace of policy change had been adjusted.

Sure, the group of ministers did talk about coordinated exit strategies, but no concrete timetables were given and comments from leading ministers suggested there was still no rush to start tightening monetary policy in major economies.

Also, ministers failed to even mention currencies in their communiqué, removing market fears that they are worried about the dollar's decline and might start talking the currency higher.

In the meantime, optimism about the global recovery continues to edge ahead, fed by news such as strong housing market data from Australia; an upgrade to China's debt rating; and new record highs in the price of gold.

All this will help to ensure that investor confidence improves, the attraction of risky assets grows and safe havens, such as the dollar, remain under pressure for now.

With the International Monetary Fund suggesting that the dollar remains overvalued, dollar sellers will feel that much more comfortable returning to the market this week.

"If anyone doubted that they should be using the dollar to fund risky trades, the IMF confirmed that it is a mainstream strategy," noted the currency research team at Royal Bank of Scotland.

Early Tuesday in Europe, the dollar got a lift after Fitch said the U.K. is most at risk from losing its AAA status. The rating company did not adjust its stable outlook or suggest a downgrade was imminent.

This helped to knock some of the optimism that had previously been boosting equities and helping higher-yielders to make gains against safe-haven currencies, such as the dollar.

At 0745 GMT, the euro was down at $1.4974 from $1.4990 late Monday in New York, according to EBS. It was also down at Y134.64 from Y134.90 while the dollar fell to Y89.91 from Y89.99.

The pound fell to $1.6653 from $1.6757 but has bounced from a low of $1.6602.