What's Going on With the Japanese Yen in Forex Trading?

The only currency that the U.S. dollar is having trouble with in currency trading this morning is the Japanese yen. The yen is heading higher in forex trading on the currency market as volatility on the FX market takes more defined shape. However, the Japanese government continues to display uncertainty on the issue of a strong yen.

For a long time, Japan has embraced a weak yen policy, since a weak yen has made Japanese exports competitive on the world market. However, with the recent elections resulting in a government overhaul, it appears that a weak yen may not remain on the agenda for much longer -- sort of.

Even though Finance Minister Fuji says he opposes intervening in the markets to keep the yen weak in forex trading, he is already backpedaling as Japan's Prime Minister points out that the recently stronger yen is hurting small businesses.

In the end, things look fairly interesting for the yen in currency trading. As the economic recovery moves forward, it might be a good idea to consider that a change may be coming.

U.S. Dollar Rebounds This Morning in Currency Trading

The U.S. dollar is rebounding this morning in currency trading on the FX market. While risk aversion was the name of the game earlier, as Asian stock markets plummeted, there is speculation that things might change soon.

Right now, even though Asian markets are closed, the U.S. stock market is heading much higher, thanks to M&A activity. The news is also turning around European stock markets. However, even so, the fact remains that gold is still below $1,000 and ounce, and oil prices remain below $67 a barrel. This relative weakness is providing some strength for the U.S. dollar.

It appears as though we will see an interesting dynamic to start the week off in forex trading for the greenback.

U.S. Dollar Likely to Remain Linked Inversely to Stocks

For the most part, over the last year or so, the U.S. dollar has been moving inversely to U.S. stocks. As stocks fall, the dollar rises as investors use it for a safe haven. Conversely, as equities rise, the dollar has been falling. GFT's Kathy Lien points this out in FX360:

Over the past year, when U.S. equities rise, the dollar tends to fall because the improvement in risk appetite eases safe haven flows that have been parked in the U.S. dollar. When 3 month LIBOR rates in U.S. fell below Japanese levels, the correlation between equities and currencies exacerbated as the dollar became the funding vehicle of choice for investors looking to assume risk.

The notable exception was yesterday. Even as U.S. equities surged higher, the dollar made gains in forex trading. However, this is likely an aberration due to the fact that ECB president Jean-Claude Trichet is talking up the importance of a strong dollar.

While the dollar and U.S. stocks may start moving in tandem again, it will take better proof that the U.S. economy is on strong footing for that to happen.

Verbal Intervention for the U.S. Dollar in Forex Trading

Many policy makers are joining together to try and arrest the decline of the U.S. dollar in forex trading on the currency market. ECB president Jean-Claude Trichet has stated that a strong greenback in currency trading is important for the world economy. Today, with the news that ECB economic recovery is slowing, and with such statements fresh in the minds of forex traders, it is no surprise that the dollar is higher in forex trading.

However, how long can such verbal intervention help? The greenback has more serious issues in currency trading related to the U.S. economy. GFT's Boris Schlossberg reports in FX360 on what is truly needed for the U.S. dollar to gain strength in forex trading:

While verbal intervention can slow down the pace of the decline, it cannot reverse it. The dollar remains dogged by the structural problems of the US economy, most importantly its alarming high unemployment rate and its ultra low short term interest rates. Until and unless the market becomes convinced that US short term rates will begin to rise, the greenback will rally only on safe haven flows.