Euro Heads Higher As U.S. Equities Continue Gains and Commodities Rise

Earlier today, the euro was pulling back in forex trading on the currency market. With profit taking and concerns about the euro zone economy, the euro was falling back a bit. Now, though, things are turning around and EUR/USD is heading higher, above 1.4300.

Continuing confidence in economic recovery is the name of the game today. U.S. equities are heading higher again, after a rather remarkable rally yesterday. Additionally, Timothy Geithner has -- for now -- allayed some Chinese concerns with regard to the health of the U.S. economy long-term.

These efforts are resulting in a weaker U.S. dollar as forex traders become interested in risk again, looking for higher yields on their currency investments. The euro is expected to gain in forex trading as global economic recovery begins, and investors move away from safe haven investments.

Euro Corrects in Forex Trading

The euro is correcting right now in forex trading on the currency market. The 16-nation currency is pulling back on the FX market as different factors slow the progress that EUR/USD has been enjoying in currency trading.

Last week, the U.S. dollar effective collapsed against the euro in forex trading on the currency market. This week, though, the story is changing a bit. Profit taking is becoming a popular strategy as forex traders cash in their gains from a high EUR/USD. Fundamental factors are also playing a role in the change by the euro in forex trading. Boris Schlossberg reports in FX360 on the unemployment rate in the euro zone:

The unemployment rate was the highest in more than 5 years and will likely get worse perhaps even reaching double digits by the fall if the higher exchange value of the unit pressures the profit margins the region’s vital export sector.

This is more proof that the euro zone economy is not as far along on the road to recovery as many would like to believe. The current unemployment rate of 9.2%  -- a number that is growing -- serves as a reminder that the euro zone economy may not have even bottomed yet.

China Backs Off On Replacing the Dollar as the Global Reserve Currency

One of the more interesting developments during the month of March was the call, made by the Chinese, for a replacement of the dollar as the global reserve currency. China had called for special drawing rights on the International Monetary Fund as the new reserve currency. Additionally, China has been entering into bilateral agreements with a number of emerging markets to increase the use of the yuan as a reserve currency. Not only that, but China has been diversifying its holdings to include more European investments and energy investments.

China cites concerns with regard to its U.S. bond holdings. With a skyrocketing U.S. deficit, quantitative easing by the Fed, and loose monetary policy, it is little surprise that China is concerned that inflation is on the way -- and that this inflation is ready to erode the value of China's U.S. investments.

However, after some talks with Secretary Treasury Timothy Geithner, Chinese officials have agreed not to try to replace the U.S. dollar as the global reserve currency -- at least for now. China appears to be interested in a recovering U.S. economy, and, in any case, even with China's best efforts, it could be at least a decade or two before it is strong enough to overcome the U.S. dollar and replace it as a global reserve currency.

The Brazilian real continues to surge in forex trading on the currency market as it becomes more desirable to investors. Forex traders are flocking to the higher yields offered by Brazilian assets, and making use of the carry trade to try and make money as risk appetite improves. The Forex Blog reports on what is driving the Brazilian real in currency trading right now:

There is now a strong amount of circularity in the relationship between the Real and Brazilian stocks/bonds, such that both are strengthening simultaneously. Accordingly, foreign (institutional) investors are rushing back into Brazil almost as quickly as they left: “More than $7.7 billion of foreign money has entered the Brazilian stock market in the year through May 12.” 

The carry trade is one of the most popular forex trading moves, but it has declined in popularity in the wake of the risk aversion caused by the global financial crisis and recession. The carry trade allows forex traders to make money on the yield difference between currencies. A low-yielding currency is used to fund the purchase of a higher-yielding currency, and money is made on the difference.

Brazilian assets have a relatively high yield, and with interest in the carry trade returning, as well as interest in emerging markets improving, it is little suprise that the Brazilian real has taken off in forex trading.