Is the U.S. Dollar Decoupling from the Risk Trade?

One of the questions that many forex traders have been asking recently is this one: Is the U.S. dollar ready to decouple from risk in currency trading? CNN Money reports on the interest investors have in the topic of the greenback in forex trading:

He said investors wanted to see if the dollar's latest move was a sign of a breakdown of the recent correlation between the U.S. currency and risk demand -- in which economic data suggesting an improving global economy would batter the dollar as it would increase risk appetite.

This question arises as the U.S. dollar consolidates is gains from last week's somewhat positive employment data. There are signs of economic recovery, and that is providing some hope that economic growth might be in the near future. As a result, it is little surprise that some are wondering if the time has come for growth to determine the direction of the greenback in forex trading.

However, it will likely be some time before this decoupling takes place for good. At least for a little while longer, the U.S. dollar likely will be somewaht connected to risk.

Sterling Falls Back in Currency Trading

The sterling is falling back in currency trading on the FX market. Last week's announced expansion of Britain's quantitative easing program stoked fears that policymakers believe that there is still plenty of weakness in the British economy, in spite of recent signs that a recovery might be on the way.

GFT's Boris Schlossberg reports in FX360 on the U.K. pound vs. the U.S. dollar in forex trading:

Cable was the weakest performer of the night, tripping stops at 1.6650 and 1.6650 on the back of a dour article in UK Telegraph that suggested UK economy could face a protracted period of Japanese style deflation and noted that BoE’s surprising expansion of the QE program was the direct result of those concerns. As we have been noting for the past week, the pound remains the most vulnerable to a pullback especially if equities decide to correct this week.

Is The U.S. Dollar Really Breaking from the Risk Trade?

There has been some speculation that the U.S. dollar may be decoupling from the risk trade. Indeed, the forex trading forecast calls for the greenback to move away from the risk trade at some point -- hopefully before it is too weakened by inflation as the economy recovers.

While there are signs that the U.S. dollar may be making a break with the risk trade, temporary departures from what has become the norm do not amount to a true break, argues the Forex Blog:

Much of the Dollar’s recent slide has been a product carry trading patterns, as investors borrow in low-yielding Dollars and invest in higher-yielding alternatives. An improvement in economic conditions could compel the Fed to hike rates, which would seriously dent the attractiveness of the carry trade. “Indeed, long-dated U.S. interest rates have been quietly moving in the dollar’s favor while U.S. interest rate futures on Friday started pricing in a federal funds rate of 1.25 percent by the mid-2010, the highest since June.” Based on this paradigm, then, it’s still risk appetite that’s driving the Dollar, whether up or down.

In the end, that means that things will take some time to change. The dollar is likely to break away from the risk trade at some point, but a complete break from it is not likely in the near future.

Euro Rangebound in Forex Trading

The euro is rangebound in forex trading on the currency market today. The 16-nation currency has been unable to break out of its range, but the dollar is not sufficiently strong to send the euro tumbling right now.

One of the issues afflicting the euro in forex trading is economic news coming out of Germany. As long as concerns persist in the German economy, which is Europe's largest and very influential, the euro will have a hard time breaking out of its range.

Forex traders await the outcome of the Fed meeting which started today and will conclude tomorrow. If an expansion of quantitative easing measures is announced, then the euro might find the boost it needs in forex trading.