As many mourn the untimely passing of legendary Senator Edward Kennedy last night market analysts mull the prophesized return of risk aversion as the doping effects of earnings season wears off. The German IFO this morning confirmed that business confidence has definitely improved – coming in at 90.5 from 87.4 last month (and beating a forecast of 89.0) This had an immediate positive effect on the Euro, sending it as high as 1.4352 against the dollar and 0.8793 against the Sterling. While EURGBP is still on it’s highs the dollar move quickly reversed – yet another example of the dollar gaining on positive news.
We have mentioned numerous times in this column that the relationship the dollar has with risk was a straight forward one. The dollar was very much a bearer of risk, a haven currency rising on any bad news and falling on any sign of improvement in economic conditions. This has reigned true ever since this crisis started however, as risk aversion begins to thaw in its intensity and long lasting effects this dynamic is slowly starting to change. We saw this transpire on the 7th Aug after better than expected NFP’s, the 21st Aug on strong existing home sales and yesterday on the back of a good consumer confidence number.
The U.S deficit forecast was reduced form $1.84 Trln to $1.58 Trln however, the longterm defecit projections were revised up by roughly $2 Trln over the next 10 years – in the long term this is seen to be an incredibly weight on the dollar. This said, at the current juncture the reduced effects of risk aversion will likely push the dollar higher in the medium term as the economy improves. One must remember that as the economy improves the dollar will be used more as a vehicle for investment, rebuilding the economy than the safe haven status it has had throughout this crisis. CHF and GBP are seen to regain this status as market dynamics change.