Greenback Gains in Forex Trading

The greenback is gaining in forex trading on the currency market this morning as risk aversion sets in. Even though the focus is likely to shift to the economy in terms of currency trading with the U.S. dollar as the week progresses, right now the focus is on risk.

With China limiting its lending, concerns about global growth are paramount. Volatility is high as forex traders rush to reposition themselves and try to figure out what could happen next.

For now, though, the U.S. dollar is gaining across the board, with the exception of its loss with regard to the Japanese yen.

U.S. Dollar Lower Against Japanese Yen in Forex Trading

The U.S. dollar is still moving lower against the Japanese yen in forex trading on the currency market. As economic uncertainty remains a big part of the picture right now, risk aversion is the name of the gain as the U.S. dollar gains against the euro and pound, but drops against the yen.

The World Economic Forum in Davos might provide a little bit of help for the risk picture, but that is unlikely anytime really soon. Investors seem to content to consolidate their positions right now and kind of wait things out a little bit.

Other items that are likely to affect forex trading on the currency market in the relatively near future include tonight's State of the Union from President Barack Obama and the Fed policy statement this afternoon.

Is The Fed Ready to Abandon Loose Monetary Policy?

Interest rate hikes could come sooner than we think, especially if the plans laid out by President Barack Obama in last night's State of the Union Address actually pan out. Obama offered a plan to increase employment by offering tax breaks to businesses, as well as laying out positions on other matters of economic interest.

The State of the Union Address comes on the heels of a monetary policy meeting from the Fed, in which one member of the board dissented, reports FX Street:

Fed member Hoenig dissented in the vote; as he believed “that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted”.

This is an interesting turn of events that indicates that, perhaps, the Fed is going to start moving away from loose monetary policy. While this is unlikely to happen in the immediate future, if Obama's plans work out and economic growth gets moving, we could see higher interest rates by the middle to end of 2010.

Is The Euro Zone Quietly Planning to Rescue Greece?

Even though the European Central Bank has stated publicly that it is not planning to stage a dramatic rescue of Greece's economy, quietly euro zone leaders are contemplating their options. Greece is not so unimportant that the euro zone is ready to lose the country.

GFT's Boris Schlossberg has information on a possible euro zone plan, and reports in FX360 on the options on the table for Greece:

“Greece will not default. Please. In the euro area, the default does not exist," Mr. Almunia told Bloomberg TV. Asked if there was any possibility Greece would leave the euro zone he said: "no chance." Although Mr. Almunia stated publicly that there was no special European plan for Greece, privately European monetary and fiscal officials appear to be moving towards a consensus for some type of a rescue package for the Greek economy. Greek GDP comprises only 3% of total EZ output, but officials fear that the political cost of Greece’s exit from the European monetary union would be far greater than the economic numbers suggest. Officials worry that a default in Greek debt could trigger a domino effect for the possible exit of other southern European nations facing similar fiscal deficit problems.

The euro is already weakened in forex trading due to issues surrounding Greece, Portugal and other euro zone countries. The fact that U.S. GDP came in much higher than expected is not helping matters much, and the euro has now sunk through the 1.4000 mark and is struggling to find support at 1.3900.