Forex7

Over the last few weeks and accelerating towards the end of last week, the US bond market collapsed. During that period, the 10-Year US Treasury yield rose 50 basis points to 5.15%, its highest level in nearly a year. Meanwhile, the USD rose to its highest levels in a couple months. Coincidence? Of course not. The relationship between the USD and US interest rates has become increasingly predictable, to the extent that increases or decreases in rates are consistently followed by a proportionate change in the value of the USD. As a result of globalization, capital can be quickly moved to the country that offers the highest risk-adjusted return. This is especially relevant for the US, which as the world’s least risky country (from a financial standpoint), tends to attract a big chunk of the world’s savings. Forex traders should take note..

Forex7

Over the last few weeks and accelerating towards the end of last week, the US bond market collapsed. During that period, the 10-Year US Treasury yield rose 50 basis points to 5.15%, its highest level in nearly a year. Meanwhile, the USD rose to its highest levels in a couple months. Coincidence? Of course not. The relationship between the USD and US interest rates has become increasingly predictable, to the extent that increases or decreases in rates are consistently followed by a proportionate change in the value of the USD. As a result of globalization, capital can be quickly moved to the country that offers the highest risk-adjusted return. This is especially relevant for the US, which as the world’s least risky country (from a financial standpoint), tends to attract a big chunk of the world’s savings. Forex traders should take note..

Forex6

By some measures, Saudi Arabia’s reserves are the fastest growing in the world. The country’s reserves recently crossed the $250 Billion threshold, and are now growing at a pace equivalent to nearly 40% per year. The source of the reserves should be a mystery to no one: oil. Oil prices have surged over the last five years, bestowing a windfall of profits to the entire Middle East region. Plus, as summer gets underway, oil prices are sure to climb further, which will ensure continued growth in Saudi forex reserves. Fortunately for the US, the majority of the world’s oil contracts are settled in USD, which means the boom in oil prices has actually stabilized the USD, despite its contribution to the US trade deficit. In addition, Saudi Arabia is one of the world’s most reliable investors in US capital markets, which means Dollar bulls can breathe a cautious sigh of relief that reserve “diversification” will probably be given short shrift by the Sauds.

Forex5

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Forex4

Although the British pound suffered earlier in the week from a large Bank of England loan, the currency has been lifted due to a survey taken by UK manufacturers. The results of the survey, which inquired about their order books, showed that manufacturers were more successful this month than they've been in over a decade. Analysts did not expect such a promising report, as it proved that the UK is handling global credit problems better than most countries. According to Forbes:The Confederation of British Industry revealed that a balance of +9 pct of firms polled reported that their order books were above normal in August - the highest level for more than 12 years.

Forex3

Friday is looking up for risky currencies, as President Bush will announce a plan to help US homeowners who are at risk of defaulting on their mortgage loan. This has eased the concerns of many forex traders who have been resting their money in low-yield currencies like the yen. Now, with the subprime mortgage issues being addressed by the US government, high-risk investments will resume. Reports Reuters:"There is some reaction to Bush's plans to help out people who are in trouble with their mortgage payments and markets are also expecting some comments from Bernanke this afternoon regarding rate cuts. Both these factors are helping the carry trade," said Carsten Fritsch, currency strategist at Commerzbank Corporates & Markets in Frankfurt.

forex2

Reports from Tokyo indicate that the US dollar is holding steady in Asia as of Monday morning. After receiving promising reports from the west, recent fears about the US credit problems have alleviated and risky trades have resumed in Asia. Since then, the dollar has strengthened considerably. The Philippine Star reports:The better US economic news slightly pared back market expectations that the US Federal Reserve will cut its benchmark interest rate next month, dealers said