Euro Plunges in Forex Trading on Austrian Banking Worries

The euro is dropping in forex trading this morning as the news comes in that things are looking uncertain for Austrian banking. A credit crisis appears to be brewing in the euro zone, and forex traders are anxious to avoid it.

As a result, euro/dollar is falling in currency trading, and it appears to be setting the stage for a U.S. dollar rally. Forex traders are turning to the greenback for its general safety and stability. The U.S. dollar is finding its legs as it is looked at as a safe haven for its stable tax payer base, but also as confidence in the U.S. economy increases and forex traders begin to consider that the fundamentals may not be so bad.

Fed Expresses Confidence in Economic Recovery

Yesterday, the Federal Reserve concluded its two-day meeting. As expected, the interest rate remained the same. However, the Fed appears to be turning a corner in its view of the economy. Yesterday's statement was the most upbeat of the year, with the Fed very nearly expressing outright optimism. Additionally, Ben Bernanke indicated that the Fed is laying the groundwork to begin withdrawing from economic stimulus efforts relatively soon.

GFT's Kathy Lien summarizes some of the highlights of yesterday's Fed statement in FX360:

The central bank believes that the deterioration in the labor market is abating and that companies have shifted from laying off staff to becoming simply reluctant to hire. They also said that income growth is modest, which is an improvement from their previous assessment that income growth was sluggish. Last month, the Fed only said that the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010.

Clearly, the Fed believes that things are looking better than they have for quite some time. While much of the better economic positioning has more to do with a slowdown in negative effects than marked improvement, things are still in train for economic recovery.

The Fed's statement was a clue that interest rate hikes might be seen sooner in 2010 than some would like, and also a signal to dollar bulls that now is a good time to rally on economic recovery and fundamentals.