ECB Expected to Cut Interest Rates

On Thursday, the European Central Bank is expected to cut interest rates. Right now, the ECB is sitting at 1.5%. A 50-point cut to 1% is the expectation.

Unlike the U.S., which has gone all in with near 0% interest rates and quantitative easing to boot, the ECB has been reluctant to take such drastic measures. Instead, the ECB has been focused on stability, reports Forbes:

"We want to establish price stability in the medium and long term," he told the European Parliament's economy committee. "What's important for confidence today is to take the appropriate decisions."

If the euro can maintain a fundamentally sound position in forex trading, it is likely to see substantial long-term gains as the global economy moves out of recession.

Japanese Yen Heads Higher in Forex Trading

As risk aversion and uncertainty set in, the yen is moving higher in currency trading on the FX market. The Japanese yen often moves higher in forex trading when risk aversion becomes and issue. Japan has a relatively stable banking system and is considered a safe haven investment.

Right now, with uncertainty over the economy, a falling stock market and concerns over goverment power grabs, investors are looking for safe havens. Another issue is that many European countries are unwilling to commit the kind of cash the U.S. is offering for economic stimulus. As a result, the uncertainty is providing a catalyst for the yen to rise against the U.S. dollar in forex trading.

U.S. Dollar Sees Strength in Currency Trading

Earlier today the U.S. dollar saw some strength in currency trading. Indeed, the dollar rally last night and this morning has been seen as a continuation of the gains made toward the end of last week.

The greenback has been gaining again in forex trading since continued concerns about the economy have surfaced. Once again, recent comments by Timothy Geithner have provided an impetus for a dollar rally as investors look for safe havens. This time, it was his comments about how much more assistance large banks are going to need in order to get through this global financial crisis.

Another consideration is the forced resignation of GM CEO Rick Wagoner. The measures the Obama Administration is taking is sending pessimism through the stock market, and reflecting in the currency market.

U.S. Dollar Forex Trading Forecast

The U.S. dollar forex trading forecast once again looks uncertain. There are three major economic events happening later this week that are likely to contribute to the future of a dollar rally in currency trading on the FX market:

Concern about the U.S. economy is likely to lead the dollar higher in forex trading. GFT's Kathy Lien analyzes a possible dollar rally in currency trading for FX360:
It will not take much for the dollar rally to last because the previous sell-off in the dollar was triggered by better than expected economic data and hope that the Obama Administration’s alphabet soup of initiatives will work. If investors become skeptical of a recovery, and they have a million reasons to be, equities could sell-off once again, driving the U.S. dollar higher. Also if the European Central Bank caves and signals that they are ready to adopt Quantitative Easing, aggressive selling of Euros will push the dollar higher as well.

Is the U.S. Economy on the Road to Recovery?

The U.S. economy might be on the road to recovery, if one looks at retail sales data. Even though consumer confidence remains near historic lows, there has been some gains in spending. The Street reports on the improvement in retail sales since November:

A sharp turnaround in retail stocks since November could be hinting at an economic recovery sooner than economists are predicting, although analysts are unsure whether the valuation and sentiment is a good mix for investors looking to bet on a rebound. 

As you can see, there are some misgivings about this turnaround. However, if retail sales are hailing an economic recovery, it is likely to result in more weakness for the U.S. dollar. Things have been volatile the last couple of days, but as things improve on the global economic stage, the greenback is likely to even out a bit -- on the downside.

U.S. Consumer Confidence Continues to Struggle

Despite the recent news that U.S. consumer spending saw improvement in February, consumer confidence surveys still show this economic indicator near lows. Consumer confidence did see a marginal improvement, but nothing like some are hoping.

A new report by the Organization of Economic Cooperation and Development (OECD) insists that government policies now in motion will prevent a depression, and there is speculation that if the report is publicized, it could help consumer confidence see some substantial improvement.

The U.S. dollar saw a bit of a correction earlier on a variety of data and news, but with the euro zone economy showing signs of weakness, and with an expected ECB rate cut on Thursday, the greenback is edging higher against the euro in forex trading.

Risk Appetite Favors Commodity Currencies

Yesterday, risk aversion sent the Japanese yen higher in forex trading. Today, the story is reversed, underscoring the volatility of the FX market. Then yen is moving lower in currency trading today as risk appetite increases and the carry trade makes a bit of a comeback.

Commodity currencies -- especially the Australian dollar -- are making solid gains against the yen in forex trading. The superior yields offered by commodity currencies are creating a situation in which forex traders are trying their luck at the carry trade.

With the U.S. stock market gaining this morning, a return to a certain level of risk appetite is being seen, and that is favoring currencies with higher yields.

World Bank to Create $50 Billion Trade Fund -- U.S. Dollar Not Threatened

The news ahead of the G20 summit later this week is all about a proposal from China -- and backed by Russia -- to create a new reserve currency system in the form of special drawing rights on the IMF.

However, despite all of the play it is getting, the idea hasn't been well-received by most of the economically developed nations. At any rate, reports FX Street, the U.S. dollar is likely safe as the world's reserve currency:

There looks to be little, if any, credible threat to the US dollar’s status as world reserve currency. Even if talk on SDRs does gain momentum at or after the G20, there’s still little chance of dethroning the dollar without more detailed proposals with legitimate

World Bank President Robert Zoellick said recently, "to create a reserve currency you need to have more than a summit or a meeting, you have to create financial markets where people feel comfortable moving in and out of the currency."

Even though World Bank is planning to create a $50 billion trade fund, it is unlikely to have any sort of impact on reserve currency status. It is merely something designed to help ease the flow of money through the global financial system.

Russia Wants a Gold Standard World Currency

Unlike the story of the adoption of the Amero, the fact that Russia is calling for a gold standard world currency is not an April Fool's joke. Indeed, Russia, with its gold ore reserves, feels that a global currency tied to gold is the way to go -- although Russia would support the idea of special drawing rights from the IMF.

It's an interesting debate that is surfacing over the creation of a global reserve currency that is not dependent upon the solvency of the U.S. government. It is clear that some countries are no longer happy with the dollar as the world's de facto reserve currency.

It is unlikely that a global currency agreement will come out of the current G20 summit in London. While countries like China and Russia want to see a global currency, most of the other G20 are reasonably content with things as they are. The gold standard is especially unlikely, since money amounts outstanding right now far exceed the paper currency available -- much less the value of available gold.

Euro Could Be in Trouble in Forex Trading

The euro might be in trouble in forex trading. The 15-nation currency has been pulling back a bit on the FX market recently, on expectations that the ECB and other euro zone leaders are unwilling to do what is necessary for economic stimulus.

There is a chance the the euro will be even more at risk when more information regarding ECB monetary policy is released tomorrow, along with a rate decision. Boris Schlossberg explains in FX360 why euro zone leaders think that they can get away with more gradual easing:

Since the majority of financing in the EZ takes place through bank loans rather than capital markets, the ECB is much more inclined to simply extend the terms of its fixed rate full-time allotment tenders from the current period of six months to a year. This would provide European banks with more time to use the capital and is much more in line with ECB preferred “credit easing” policy rather than pure quantitative policy of the Fed, BoE and BoJ.

In the short-term, this type of policy might be detrimental to the euro in forex trading. However, gradual easing, and a refusal to rush into economic stimulus may set up the euro for more strength down the road when fundamentals become more important.

U.S. Payroll Data: Job Losses to Exceed 700k in March?

One of the essential pieces of information that determines forex trading forecast is payroll data. U.S. data is expected to be released soon, and that means that the fate of the dollar -- at least short term, is soon to be determined. Kathy Lien reports on the possibility of -700k jobs for March in FX360:

It is very realistic for job losses this month to have exceeded -700k. The current forecast is for a -660k decline. Unlike previous months, non-farm payrolls is more difficult to call because service sector ISM which is a leading indicator for payrolls is being released after NFP. The employment component of manufacturing ISM increased marginally in February but remains near record lows.

This is a rather large decline, and things could get ugly. It could mean another dollar rally, though, if it leads forex traders to go for a safe haven.

Accounting Changes for Banks

This morning the U.S. Financial Accounting Standards Board created some new rules that may help banks as they struggle with their balance sheets. The Financial Times reports on the new rules:

The Financial Accounting Standards Board voted on Thursday morning to allow banks more freedom to use their own valuation models, rather than current market prices, for assets where markets have become illiquid. A second rule change means banks will only have to recognise a part of any impairment in their profits.

This move emphasizes the fact that perception has a great deal to do with how investments fare. Clearly, being able to change the perception of the value of their assets will help banks. It is important to remember that, whether dealing with stocks or currencies, perception plays a big role in market performance.

Swis Franc Forex Trading Forecast: Intervention to Maintain Weakness

The Swiss franc forex trading forecast is likely to be one of weakness. The Swiss National Bank has been making efforts to decouple the currency from its status as a safe haven. Additionally, the SNB is interested in maintaining franc weakness through this recession.

Last month, the Swiss National Bank made it clear that it is more than willing to keep the franc weak in currency trading. Today, officials with the SNB are again threatening direct intervention in order to keep the franc weak.

Other central banks may balk at direct intervention, but the Swiss are content to have a weak currency right now, and will do what it takes to keep the franc down.

Is China Making a Bid to Replace the Dollar with the Yuan?

Recently, China suggested that a global reserve currency be adopted -- one based on special drawing rights on the International Monetary Fund. However, Chinese officials must have realized at the outset that such a suggestion would probably not be seriously considered. Instead, China has been arranging swaps with emerging markets and trying to increase the number of countries using the Chinese yuan.

Right now, the main swap is focused on Argentina. China arranged a swap of Argentine pesos for Chinese yuan. The swap provides backing for the peso -- and establishes the yuan as a reserve currency of sorts. The Forex Blog reports on the likely motives behind the currency swap:

In actuality, the swap was probably proposed by China in order to demonstrate its sincerity in seeing the Dollar replaced as reserve currency. Especially among developing countries and/or Asian countries, many of which represent major trading partners, China is keen to increase the supply of Yuan.

If China can get more emerging markets and others to increase their own supplies of yuan, a global reserve currency via the IMF to replace the dollar won't be necessary. It could be that China's true aim is to get people thinking that maybe the dollar shouldn't be the world's reserve currency, opening them up to the idea of a new currency backed by China.

How Will the G20 Summit Affect the U.S. Dollar in Currency Trading?

In addition to considering the ECB rate cut this week, forex traders should also consider how the G20 summit is likely to affect the U.S. dollar in currency trading. There are a number of outside factors to consider for the greenback in forex trading as the week comes to a close.

GFT's Kathy Lien points this out in FX360 about how the G20 summit is likely to affect the U.S. dollar in currency trading:

However the G20 will commit more money for the IMF and will most likely agree to tighter regulation of hedge funds and stricter standards for banks. Since investors do not expect anything groundbreaking from the G20, the risk is only to the upside. This means that if the G20 delivers anything above and beyond more regulations and additional money for the IMF, it would be a pleasant surprise that could be taken positively by the currency and equity markets.

Measures to stabilize the economy are likely to provide a basis for risk appetite, which could change the way the dollar is traded. Another issue will be how the G20 summit combined with ECB decisions will affect the U.S. dollar. With increased economic measures possible, and the idea that the euro zone may not get on board, it could mean a euro sell-off, sending the dollar higher.

Of course, the currency market is always volatile, and things may play out completely differently. If fundamentals become an issue, the euro may have the upper hand in forex trading, since the ECB persists in insisting that inflation may still be an issue, and euro zone leaders haven't subscribed to near the amount of debt that is being seen in the U.S.

ECB Cuts Interest Rates 25 Basis Points

The European Central Bank cut interest rates today in a way that was both expected and unexpected. A rate cut by the ECB was expected. It has been increasingly clear that euro zone leaders need to do something to help in terms of economic stimulus. The unexpectedness came in the form of the 25 basis point cut. Many analysts expected the ECB to cut rates to 1%, which would have been a 50 point cut.

Clearly, euro zone leaders remain hawkishly optimistic about inflation, and are reluctant to make large cuts. Additionally, this smaller cut, to 1.25%, could be an indicator that euro zone leaders probably consider their floor to be 1%. A small 25 point cut this time leaves room for the ECB to cut again later if adequate economic progress is not seen.

The euro has been higher today in forex trading on the news. Even though plans for quantitative easing have not been revealed, there is a feeling that the ECB will soon have no choice. The currency market is responding to two ideas seemingly in conflict:

Canadian Dollar Advances in Currency Trading

The Canadian dollar is advancing in currency trading on the FX market today. With risk appetite improving, it is no surprise that the U.S. dollar is falling in forex trading to the loonie.

Indeed, with the stock market still doing relatively well (it's down, but not by much), and with pledges out of the G20 summit, things are set to favor the Canadian dollar in currency trading.

With the global economy expected to improve as nations make efforts to keep capital flowing and stimulate their economies, commodity currencies like the loonie will benefit. Additionally, other currencies will have the chance to rise again with the U.S. dollar no longer needed as a safe haven currency.

U.K. Economic Data Helps Pound in Forex Trading

U.K. economic data is helping the pound in forex trading on the currency market today. One of the key bits of helpful economic data today is the PMI data that was released. A significant change to the positive has taken place, and that is helping the sterling in currency trading.

Improving economic indicators could provide clues that the British economy is stabilizing. Numbers are no long in what amounts to a freefall, and they seem to be turning around in some cases. This is good news for the British economy -- and for the U.K. pound in forex trading.

Indeed, sterling made it to 1.4800 against the dollar in currency trading. With risk appetite improving, and stocks holding their own (though down slightly on jobless data), the U.K. pound is likely to do well in forex trading in the coming days.

Unemployment Continues to Rise

Unemployment continues to rise. The most recent job loss numbers are right in line with expectations, however. Non-farm payrolls showed a loss of 663,000 jobs, and the unemployment rate has risen to 8.5% -- the highest it's been in 26 years.

Part of the problem is that measures aimed to increase employment, which were passed in the recent economic stimulus bill, have not been put into effect. Another issue is that companies continue to try and bolster the bottom line by cutting costs. More alarmingly, though, is the assessment by a Maryland profession in Financial Times:

“The economy is shifting to permanently lower levels of production and employment, as the recession nears [a] turn into a depression,” said Peter Morici, professor at the University of Maryland’s business school. “Fundamental structural problems—poorly managed banks, wasteful uses for imported oil and the lopsided rules for competition with China and other Asia mercantilists—have come home to roost and threaten to topple American prosperity.”

The fundamentals of the U.S. economy may be in trouble, and that could mean long-term problems for the U.S. dollar in currency trading. Indeed, problems may already be on the way for the greenback in forex trading. Today's payroll news didn't prompt the same levels of safe haven buying that other weak economic data have.